Astravise – Agility in Action & Innovation at Scale

What is the difference between cash runway and burn rate?

Posted on August 30, 2024 by Venkatesh Bhat

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      "text": "<div><p>The <b>Burn rate</b> is an essential indicator of how long the company can operate with its available cash reserve. It is expressed as a monthly rate.</p>
<p>The burn rate is an important metric for companies that are not yet profitable. These companies can be either startups or other companies. The burn rate is the total of all your operating expenses, such as salaries, rent, sales and marketing costs. It represents the expenditure that the organization is incurring finetuning its strategy, developing its products/ services, testing markets, and paying interest if the debt has been used to finance operations.</p>
<p>The Founder’s Business Plan consists of various strategic questions that need answers and the time and cost of finding those answers till the company reaches a certain level of steady and profitable revenue base. The total of monies that are needed to complete these activities is roughly the funding needs of the founders. Once this total spend is identified and allocated to time periods, burn rates will be established. Thus, the burn rate is not a constant number. Rather, it is a moving number that changes from month to month or quarter to quarter during the early journey of the startup.</p>
<p>It is important to understand that, in the context of most startups, a total cash burn is a flexible number; if they are able to answer the questions swiftly, there can be higher spending in the ensuing months, but they will reach a point of stability faster. In the absence of risk capital, founders need to prioritize spending on those tasks or actions that will assist in getting the next round of funding. In such a case, the immediate cash spent may be low, but the startup will take a longer period to reach stability.</p>
<p>Most investors are interested in the immediate few months’ cash burn rather than the total cash burn. The other reason for the interest in the immediate cash burn is that the underlying decisions leading to this cash burn would have been taken or are to be taken at the time of the current round of funding.</p>
<p>A high burn rate indicates that the company is spending money quickly, while a low burn rate suggests that the company is optimizing cash burn and probably waiting for a key event – the arrival of risk capital or an external critical event that can significantly impact the firm’s prospects.</p>
<p>Investors want founders to take calculated risks and be aggressive in testing their assumptions; however, profligacy in spending and inability to largely stick to a cash spend agreed with investors will lead to the start-up becoming less attractive for future investments. Hence, monitoring the burn rate is critical for realigning the strategy and fostering growth.</p>
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      "text": "<div><p>Burn rates are classified into two types:</p><ul><li>gross burn rate</li><li>net burn rate</li></ul><p><u><strong>The gross burn rate&nbsp;</strong></u>is the total amount of money a company spends on monthly operating expenses. They include the cost of goods sold, salaries, utilities, marketing, and other expenses. The burn rate is normally calculated as the average expenditure for the next 3 to 6 months. If the burn rate is mentioned without reference to a period, it normally means the next month’s burn rate.</p><p>The calculation formula for gross burn rate is = Gross Expenses/number of months</p><p><u><strong>The net burn rate&nbsp;</strong></u>combines the company’s revenue and operating expenses. It is computed by deducting monthly revenue from monthly expenses. If the company has a positive revenues, its net burn rate will be lower than its gross burn rate. If revenue is negative, the net burn rate will be greater than the gross burn rate.</p><p>The formula for calculating net burn is Gross burn – (revenue -cost of goods sold) = Net burn.</p><p>The formula for calculating net burn rate = net burn/ number of months</p></div>"
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      "text": "<div><p>A reduced burn rate is required to sustain and grow the business in the long run. This can be done by introducing a few tested and successful ways.</p><ul><li>Plan new revenue-generating strategies, such as expanding your customer base, implementing a new pricing strategy, entering new markets, and increasing sales.</li><li>Staff reduction is a widely accepted practice that is carried out effectively around the world. Firms need to stop recruiting for extended periods, focus on outsourcing service functions like accounting and HR, and hire freelancers.</li><li>Reducing unnecessary costs such as office space and travel and renegotiating vendor contract terms.</li><li>Introduce technology wherever possible, such as routine task automation, outsourcing non-core functions, and increasing operational efficiency.</li>
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    "name": "What is a cash runway?",
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      "text": "<div><p><b>Cash runway</b> is a financial metric that measures how long a company can continue to operate before running out of funds. Since this calculation is done mainly by firms yet to taste profit, it helps them plan their resources efficiently and allocate them effectively.</p>
<p>The formula for calculation is = Current Cash balance / Burn rate</p><p>In general, a minimum of six months to 12 months of cash runway is needed for a startup to confidently execute its plans. Once the cash runway shortens, the startup needs to take action to ensure the burn rate is reduced and the cash runway is extended.</p><p>In the context of funding winter, the importance of having a good cash runway cannot be overstated. Where possible, debt funds should be used to augment the cash balance so that the overall cash runway is extended. Being ahead of the business milestones (achieving them with lesser burn and at a shorter period) and agreeing with existing investors helps the startup secure promised infusions of capital and also attracts new capital.</p></div>"
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      "text": "<div><p>The burn rate and cash runway are critical financial metrics to assess the company’s financial strength and health. These metrics evaluate startups and businesses that are not yet profitable. They do, however, represent distinct aspects of the financial situation. Let us know where they differ.</p></div><div class=\"table-1\"><table width=\"100%\"><thead><tr><th align=\"left\"><strong>Burn Rate</strong></th><th align=\"left\"><strong>Cash runway</strong></th></tr></thead><tbody><tr><td align=\"left\">It measures how it spends its cash reserves.</td>
<td align=\"left\">It measures the amount of time a company has before it runs out of cash.</td></tr><tr><td align=\"left\">Calculated on a monthly basis, this figure represents how much money is spent each month to fund the organization’s operations.</td><td align=\"left\">Calculated by dividing the company’s current cash balance by its monthly burn rate. The outcome number represents the number of days the company can continue to operate before it exhausts its cash.</td></tr></tbody></table></div><div><p>Both metrics capture the company’s financial health from different perspectives and must be used in tandem to provide a complete picture of the company’s financial position.</p>
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</script>[/fusion_code][fusion_text columns=”1″ animation_direction=”up” animation_speed=”0.1″ hide_on_mobile=”small-visibility,medium-visibility,large-visibility” sticky_display=”normal,sticky” font_size=”20″]When founders pitch their products, investors frequently ask this mundane but critical question. What is your current cash burn rate and cash runway? Founders cannot avoid answering this question; they must have a credible response.

Understanding of burn rate and cash runway is critical for founders because it allows them to make informed decisions about their company’s financial health and future. It assists them in managing investor expectations, planning for the future, and making strategic decisions that will lead to long-term success.[/fusion_text][fusion_title title_type=”text” rotation_effect=”bounceIn” display_time=”1200″ highlight_effect=”circle” loop_animation=”off” highlight_width=”9″ highlight_top_margin=”0″ title_link=”off” link_target=”_self” content_align=”left” size=”2″ text_shadow=”no” text_shadow_blur=”0″ gradient_font=”no” gradient_start_position=”0″ gradient_end_position=”100″ gradient_type=”linear” radial_direction=”center center” linear_angle=”180″ style_type=”none” animation_direction=”left” animation_speed=”0.3″ hide_on_mobile=”small-visibility,medium-visibility,large-visibility” sticky_display=”normal,sticky” font_size=”28″]

What is Cash Burn Rate?

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The Burn rate is an essential indicator of how long the company can operate with its available cash reserve. It is expressed as a monthly rate.

The burn rate is an important metric for companies that are not yet profitable. These companies can be either startups or other companies. The burn rate is the total of all your operating expenses, such as salaries, rent, sales and marketing costs. It represents the expenditure that the organization is incurring finetuning its strategy, developing its products/ services, testing markets, and paying interest if the debt has been used to finance operations.

The Founder’s Business Plan consists of various strategic questions that need answers and the time and cost of finding those answers till the company reaches a certain level of steady and profitable revenue base. The total of monies that are needed to complete these activities is roughly the funding needs of the founders. Once this total spend is identified and allocated to time periods, burn rates will be established. Thus, the burn rate is not a constant number. Rather, it is a moving number that changes from month to month or quarter to quarter during the early journey of the startup.

It is important to understand that, in the context of most startups, a total cash burn is a flexible number; if they are able to answer the questions swiftly, there can be higher spending in the ensuing months, but they will reach a point of stability faster. In the absence of risk capital, founders need to prioritize spending on those tasks or actions that will assist in getting the next round of funding. In such a case, the immediate cash spent may be low, but the startup will take a longer period to reach stability.

Most investors are interested in the immediate few months’ cash burn rather than the total cash burn. The other reason for the interest in the immediate cash burn is that the underlying decisions leading to this cash burn would have been taken or are to be taken at the time of the current round of funding.

A high burn rate indicates that the company is spending money quickly, while a low burn rate suggests that the company is optimizing cash burn and probably waiting for a key event – the arrival of risk capital or an external critical event that can significantly impact the firm’s prospects.

Investors want founders to take calculated risks and be aggressive in testing their assumptions; however, profligacy in spending and inability to largely stick to a cash spend agreed with investors will lead to the start-up becoming less attractive for future investments. Hence, monitoring the burn rate is critical for realigning the strategy and fostering growth.

Looking for

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Finance Advisory, Managed HR Services

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Reach Us!

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Risk Assessment in Businesses – What, Why, When, and How?

What are the types of Burn Rates?

[/fusion_title][fusion_text animation_direction=”left” animation_speed=”0.3″ hide_on_mobile=”small-visibility,medium-visibility,large-visibility” sticky_display=”normal,sticky” margin_top=”10″ font_size=”18″]Burn rates are classified into two types:

gross burn rate
net burn rate

The gross burn rate is the total amount of money a company spends on monthly operating expenses. They include the cost of goods sold, salaries, utilities, marketing, and other expenses. The burn rate is normally calculated as the average expenditure for the next 3 to 6 months. If the burn rate is mentioned without reference to a period, it normally means the next month’s burn rate.

The calculation formula for gross burn rate is = Gross Expenses/number of months

The net burn rate combines the company’s revenue and operating expenses. It is computed by deducting monthly revenue from monthly expenses. If the company has a positive revenues, its net burn rate will be lower than its gross burn rate. If revenue is negative, the net burn rate will be greater than the gross burn rate.

The formula for calculating net burn is Gross burn – (revenue -cost of goods sold) = Net burn.

The formula for calculating net burn rate = net burn/ number of months[/fusion_text][fusion_title title_type=”text” rotation_effect=”bounceIn” display_time=”1200″ highlight_effect=”circle” loop_animation=”off” highlight_width=”9″ highlight_top_margin=”0″ title_link=”off” link_target=”_self” content_align=”left” size=”2″ text_shadow=”no” text_shadow_blur=”0″ gradient_font=”no” gradient_start_position=”0″ gradient_end_position=”100″ gradient_type=”linear” radial_direction=”center center” linear_angle=”180″ style_type=”none” animation_direction=”left” animation_speed=”0.3″ hide_on_mobile=”small-visibility,medium-visibility,large-visibility” sticky_display=”normal,sticky” font_size=”28″]

How can firms reduce their burn rate?

Plan new revenue-generating strategies, such as expanding your customer base, implementing a new pricing strategy, entering new markets, and increasing sales.
Staff reduction is a widely accepted practice that is carried out effectively around the world. Firms need to stop recruiting for extended periods, focus on outsourcing service functions like accounting and HR, and hire freelancers.
Reducing unnecessary costs such as office space and travel and renegotiating vendor contract terms.
Introduce technology wherever possible, such as routine task automation, outsourcing non-core functions, and increasing operational efficiency.

[/fusion_text][fusion_title title_type=”text” rotation_effect=”bounceIn” display_time=”1200″ highlight_effect=”circle” loop_animation=”off” highlight_width=”9″ highlight_top_margin=”0″ title_link=”off” link_target=”_self” content_align=”left” size=”2″ text_shadow=”no” text_shadow_blur=”0″ gradient_font=”no” gradient_start_position=”0″ gradient_end_position=”100″ gradient_type=”linear” radial_direction=”center center” linear_angle=”180″ style_type=”none” animation_direction=”left” animation_speed=”0.3″ hide_on_mobile=”small-visibility,medium-visibility,large-visibility” sticky_display=”normal,sticky” font_size=”28″]

What is a cash runway?

Cash runway is a financial metric that measures how long a company can continue to operate before running out of funds. Since this calculation is done mainly by firms yet to taste profit, it helps them plan their resources efficiently and allocate them effectively.

The formula for calculation is = Current Cash balance / Burn rate

In general, a minimum of six months to 12 months of cash runway is needed for a startup to confidently execute its plans. Once the cash runway shortens, the startup needs to take action to ensure the burn rate is reduced and the cash runway is extended.

In the context of funding winter, the importance of having a good cash runway cannot be overstated. Where possible, debt funds should be used to augment the cash balance so that the overall cash runway is extended. Being ahead of the business milestones (achieving them with lesser burn and at a shorter period) and agreeing with existing investors helps the startup secure promised infusions of capital and also attracts new capital.

What are the differences between burn rates and cash runway?

The burn rate and cash runway are critical financial metrics to assess the company’s financial strength and health. These metrics evaluate startups and businesses that are not yet profitable. They do, however, represent distinct aspects of the financial situation. Let us know where they differ.

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Burn Rate	Cash runway
It measures how it spends its cash reserves.	It measures the amount of time a company has before it runs out of cash.
Calculated on a monthly basis, this figure represents how much money is spent each month to fund the organization’s operations.	Calculated by dividing the company’s current cash balance by its monthly burn rate. The outcome number represents the number of days the company can continue to operate before it exhausts its cash.

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Both metrics capture the company’s financial health from different perspectives and must be used in tandem to provide a complete picture of the company’s financial position.

Closing thoughts:

There are numerous startups that are unable to control their burn rates due to a lack of experience in planning. It is important to understand that the key in cash burn management is not cutting down expenditure; it is planning key business milestones with optimum cash burns, and, where the market situation demands it, being able to change the spending plan in view of resources in hand. Because they do not receive proper guidance, these firms script their premature end. Our company, Astravise, is in the business of assisting businesses in covering up gaps in planning and execution. Our teams have the expertise to identify gaps in startup business models, allowing them to optimize their burn rates and cash runway while increasing the firm’s revenue.

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Risk Assessment in Businesses – What, Why, When, and How?

Posted on August 25, 2024 by Venkatesh Bhat

Entrepreneurs enter the business world to make a profit as a reward. They build their product/service portfolios, work hard on acquiring and retaining customers, and build an organization to sustain profit-generating activities. Either a business proactively identifies and analyzes probable or likely risks to their bottom line, or a disaster, a likely investor, or a regulatory change may force the company to assess all risks comprehensively. When running a business, risk comes from both internal and external sources. Successful business people anticipate, accept, and incorporate these elements into their primary business strategy. The risk management process begins with risk assessment.

What is a business risk assessment?

A business risk assessment identifies, analyzes, and evaluates potential risks that may jeopardize the company’s financial, operational, and public relations disciplines. Market risks, financial risks, legal risks, operational risks, and, finally, strategic risks must all be assessed.

Due to this risk assessment, companies are better positioned to identify potential threats, their likelihood, and their impact on their business. Based on these findings, plans are developed to avoid, mitigate, and transfer the risks. This assessment is not a one-time event but an ongoing process that must be reviewed and updated regularly to reflect new risks and challenges.

All security frameworks, for the following reasons, require risk assessment:

Understand your critical assets and the potential threats to them.
Allows you to evaluate your security controls and determine whether their protective mechanism is adequate.
What are the consequences of those risks?
Implement preventative rather than reactive procedures.

Looking for

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Finance Advisory, Managed HR Services

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What are the typical business risks that get flagged?

A glance at the typical business risks for founders to protect their companies from:

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Financial Risks

Financial risk is the cash flow in the business when there is an unexpected financial loss. If the company cannot manage its debt payments, it will face financial difficulties. Firms with a higher level of debt face financial risk if they cannot make timely payments to their creditors.

Financial risk can be classified as follows:

Credit risk occurs when a company extends a credit line to a customer and the customer fails to make payments. Similarly, creditors provide business credit, and the company defaults on the payment.
Currency risk or exchange risk, occurs when the prices of the trading countries’ currencies fluctuate.
Liquidity risk arises when a company cannot convert its assets into cash. This risk arises when a company requires a specific amount of cash to meet its short-term debt obligations.

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Market Risks

Market risks are the potential losses that the company may face as a result of changes in market conditions. This assessment is important in risk management because it helps both investors and businesses identify potential threats to their financial stability and implement corrective measures to mitigate them.

The various types of market risks are mentioned below:

Geopolitical risk arises as a result of changes in the political situations of the countries with which the company does business. It could be political unrest, unprecedented events, or natural disasters in the region. For example, the war in Ukraine causes imported goods to take longer to reach other locations, increasing their cost.
Innovation risk arises as a result of technological changes. Customers are looking for alternatives as the market for the current item shrinks. Then, businesses must invest resources in constant research to introduce innovation to their products. For example, Nokia did not anticipate the emergence of smartphones and thus lost a large portion of the market to the iPhone.
Competitors risk arises when businesses fail to analyze their competitors’ strengths and make changes to meet the needs and preferences of the time. For example, many American airlines are losing customers because they cannot compete with Middle Eastern airlines such as Emirates and Qatar Airways.
Government policies risk arises when there are new policies related to the business are introduced and made mandatory for the denizens to adhere to. The policy change happens when a new government is formed or the present regime during the election year for getting a popularity boost. For E.g. the Sales tax replaced GST in India in 2017 made a huge impact on all businesses and citizens across the board.

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What is the difference between cash runway and burn rate?

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Cybersecurity Risks

There are hardly any industrial sectors where digitalization is not happening. With the rapid growth of online activities and payments, sensitive customer data is at risk. Customers expect that their data will be safe from any form of cyber theft. It has become mandatory for businesses to secure their cyberspace against any security breach or fraudulent activity.

When these incidents occur, consumer confidence and trust in companies can suffer. Not only do security breaches jeopardize a company’s reputation, but they can also leave the company financially liable for damages. E.g. Mydoom malware caused estimated damage of $38 billion in 2004.

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Compliance and legal Risks

Companies face legal risks if they violate government regulations like environmental regulations and the discharge of hazardous waste materials.

Employers must follow HSE (Health, Safety, and Environment) standards for their employees. If working in remote areas, they need proper working conditions, safety, and protective gear. Companies violating these laws are subject to various forms of punishment depending upon the type of damage.

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Risk Management

Some risks are inherent to the nature of businesses. For example, infrastructure companies require large amounts of long-term funds -both debt and equity and timely availability is a significant risk. There can also be risks that are not linked to the nature of business, e.g., over-dependence on one vendor for a critical component in a manufacturing business. Managing the risks depends on this distinction as well as the availability of options to manage the risks. Accordingly, risks may be fully eliminated, their impact may be minimized or substituted, if substitution is possible, or they may have to be managed with appropriate organizational processes. Taking appropriate insurance covers, tweaking business processes to spread risks, having conservative financial policies, reviewing the organizational structure, and defining control processes for risk management, are some of the risk management techniques.

Role of Astravise

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Companies find it challenging to assess business risks on their own for a variety of reasons. It is always best to delegate this problem to subject matter experts.

Astravise team has decades of experience running finance and operations in organizations of various sizes. We have also conducted risk assessment exercises as part of due diligence for our clients. We bring in external business expertise, where necessary to ensure clients get a comprehensive view of market, financial, legal, regulatory, operational, and cybersecurity risks.

We assist businesses in assessing their financial risks by analyzing financial statements and reviewing internal controls to detect any form of potential risk, such as fraud or accounting errors. Regularly, we analyze the company’s cash flow to identify liquidity risk and develop a strategy to stabilize the cash flow.

Along with financial controls, we thoroughly check our risk management strategy, scenario planning, and compliance monitoring to avoid any gaps in our assessment.

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LEAD Measures for the Ace Leader

Posted on August 20, 2024 by Venkatesh Bhat

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One must focus on measures that their team has the power to influence instead of those can be tracked but not controlled.

When I attempted to follow up with my son about the preparations for his exams and the measures he was taking to study, he once retorted that I shouldn’t scrutinize every minute detail of his day, but instead focus on the actual goal, which was to secure a good score in the exams.

His words made me reflect on my work as a manger – of people primarily, and all that it included, from to-do lists and Operations reviews to daily team huddles and meetings with CEO. One “follows up with” (read: scrutinizes) a team that is perpetually overwhelmed with urgent, need-a-solution-now issues (critical payments, audit enquiries, etc.) to keep a tab on their deliverables. The confidence of meeting the EBITDA and Cash targets slowly drifts, and the actual performance gap at the end of the period also requires its fair share of time.

Measures that cannot be influenced in execution mode inevitably lead to unexpected results

There always exist unexpected results at the end of a period, despite a seemingly endless list of measures that are regularly tracked. This is primarily because delivery teams are not always in control of LAG measures such as EBITDA and Cash. Therefore, it is imperative to focus instead on measures that the team does have the power to influence and monitor in execution mode, otherwise known as LEAD measures.

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Finance Advisory, Managed HR Services

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Measures that allow strategy modification in execution mode are much more effective

Collections, a critical yet highly unpredictable area, stands to benefit immensely from a LEAD indicator to guide teams through the month, much more so than deploying corrective actions after missing target. Upon pushing the team for such an elusive measure, the key insight was gleaned from the month in which the target had been met. In that period, the collection plan had been rolled out along with customer and invoice-level data by the 2nd, and the resulting cash actual achievement was fairly within reach of the estimated targets given. My Controller’s insight on deeper analysis was simple yet effective: what made this month’s target achievable was focusing collections on the top 5 customers by mid-month. Dashboards were modifies to reflect collection performance of specific customers within a certain date as the predictors of the month-end cash position.

Focus on LEAD measures proves more effective than corrective measures after a missed target
LEAD measures can be influenced in real time, giving greater control over target achievement than LAG measures
LEAD measures eliminate the possibility of unexpected results that may arise despite exhaustive tracking of LAG measures

I have even put these LEAD measures and their efficacy to the test in everyday life. In the case of my son’s exam preparations, simply following up with him on the “actual goal”, instead of the preparation work which would directly impact his final scores, and which he believed he had complete control over, would not do, and so we met each other half way. Applying the same concept of LEAD indicators that helped my collections team succeed, we agreed upon “100% completion of each subject portion with one revision in exam holidays per a scheduled time table”. If the daily deviations from his time table went beyond 20%, it would prompt a recast to his schedule. Needless to say, he was delighted by the fact that he could monitor and influence his progress, and that “reporting” back to me acme down to a bare minimum.

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Prospects and Background of MSME in India

Just because a lot of businesses do it, doesn’t make tracking LAG indicators the most efficient

Ironically, LAG indicators, which are outcomes of actions over a period and for the most part merely academic, are what businesses track to monitor performance. However, applying the LEAD measure has proven to work in more instances than one, such as the Network team of a telecom company that had customer satisfaction (C-SAT) as a key metric, who changed their focus to “Network Uptime %” as an actionable metric, leading to higher C-SAT scores. The differences was that Network Uptime % was a metric that was understood and influenced to improve by the entire Network team, whereas C-SAT scores gave them no leverage to work with whatsoever.

Conclusion

It is not an easy process, but identifying a LEAD measure that reasonably predicts the outcome and is within the influence of the team, makes target predictable. This takes the responsibility and accountability back to the operating team, and not the CEO.

This is how I eliminated the need to relentlessly scrutinize my son’s progress, for now he is scrutinizing it himself!

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