How not to die hard: Lessons in cash burn management

What is corporate cash burn?

In a nutshell, cash burn is the rate at which a company uses up its cash reserves or investments. It's like the fuel in a car. Startups and scaleups must keep their tanks topped up to last a long journey without running out of gas. Naturally, smart corporate expense management is a crucial part of the bigger engine that drives this car. Companies need complete control and oversight of money going out, no matter who's spending it. With 82% of businesses failing due to poor cash flow management, the stakes could not be higher.

How cash burn rate affects financial planning (and why you need real-time visibility)

Managing cash burn is a real tightrope walk. On the one hand, healthy financial growth means investing in people, products, marketing, security compliance, etc. On the other hand, you also need to ensure that your expenses don't surpass your income.

Therefore, cash burn and maintaining a healthy balance sheet should be essential to financial planning, no matter the scale of your company or the size of your investment — and investors will expect to see this documented explicitly.

Our CEO and co-founder, Hristo Borisov, says:

The most important thing is to show the right cash burn and efficiency metrics. First of all, it starts with unit economics. These are the fundamentals for every business. Ensuring that you have sound unit economics and that you're actually making money from every customer rather than losing money with every customer is quite important.

"CFOs and founders can use spend management solutions to demonstrate and create visibility and efficiency in operating the business. First of all, they gain real-time visibility over the spend and expenses in the business. And this is immediate so that they know what's happening with the company in real time. They should also do a lot of budgeting and forecasting. Forecasting allows them to really understand how they're going against their forecast and monitor their cash levels.”

“They can do multi-entity management and consolidated group management to make overall visibility easier and more in-depth because usually businesses that are scaling fast have complex structures and need specialized options."

Case studies: Three companies burnt by poor сash flow management

1. Consider the story of Flipkart, India's largest e-commerce company, which apparently had the 'biggest cash burn in a year by any new-age company in the country, according to industry estimates.'

In the financial year (ending September 2022), Flipkart's cash burn rate was US$3.7 bn. Such an aggressive expansion led to an alarming rate of cash consumption throughout the organization. This led to overall efficiency declines in the company and inorganic growth.

Flipkart's story demonstrates the fine line between growth and financial prudence.

2. Another example is Carvana, a company identified as a 'zombie company' with a high risk of its stock plummeting to zero due to its cash burn practices. When Carvana was growing rapidly, investors had tons of hope in it, but when reality kicked in, they realized that the company might never turn a profit on their sheets. As a result, CVNA Stock plummeted 97%+ in less than a year.

3. Finally, one of the most famous recent examples of cash flow management challenges and high burn rates is the story of WeWork. Once a $47 billion coworking powerhouse, WeWork's high cash burn rate alarmed many investors despite the company's explosive expansion and ultimately led to an unsuccessful IPO effort in 2019 and bankruptcy in 2023 across the US and Canada.

Three strategies to improve cash burn rate

Improving the cash burn rate involves increasing revenue, decreasing expenses, or, ideally, both. Here are three of the top cash burn management techniques you can use to improve your financial planning:

1. Establish a good burn rate benchmark

Setting up a benchmark for burn rate can help you assess your spending and make the required corrections. Aim for a burn rate that gives you at least 18 months of runway. And adjust your benchmark based on your industry and stage of business.

More established companies can allow going ‘out of money’ for longer in favor of expansion and development, while startups tend to belly-up faster.

Watch the video for a complete rundown of spend management tips for scaleups

2. Optimize revenue streams

Your scaleup should continuously explore ways to optimize its revenue streams. These initiatives could involve any of the following activities and more:

• Creating and improving a stellar product offering
• Altering pricing strategy
• Entering new markets
• Leveraging existing customer relationships

3. Identify and reduce unnecessary expenses

Thoroughly and frequently reviewing your business expenses will help you pinpoint areas to cut costs without impacting operations. This could involve renegotiating contracts, streamlining processes, or advancing ROI-driven digital transformation by implementing new technologies.

Take our customer, State of Play Hospitality, for example. Their VP of Finance in the USA, Andrew Jacobi, says:

At the end of the period, we look at two things. First, were we able to forecast our spend correctly? For this, we put Payhawk directly in the hands of our venue managers so they can report on what they're spending money on. This approach means they can track spend against their budget and ensure they meet it across each general ledger category. Then, at the end of the period, we look at variance to budget — seeing whether a spend category exceeded or came in under budget. Payhawk allows us to spot if there's overspending in specific places up and down our P&L very quickly. For example, if we see that we're spending too much or more than expected on DJs in a particular venue.

Proper cash burn management = Long-term financial sustainability

Understanding and keeping tabs on your cash burn is a total game-changer when steering your startup or scaleup in the right financial direction. By closely monitoring cash burn and making necessary adjustments, you can ensure financial sustainability and set yourself up for long-term success. And you can automate a big part of this process using a modern spend management solution.

Think of it this way: It's not about zooming through your cash at lightning speed but more about driving smartly to ensure you have enough gas for the entire journey. After all, in the scaleup world, it's not always the fastest car that wins the race but the one that knows how to manage its fuel effectively.

Check out our blog and money management guide for more tips on managing cash burn effectively. Happy planning.