If your business is losing money, you have a situation that can’t be sustained indefinitely. The clock is ticking and, unless changes are made, your business will fail.
The Cash Burn
In the days of the dot.com bubble in the late 1990s, a new measure became the rage called the cash burn, measured in months.
This was the number of months the business could continue to trade as it currently was, before it ran out of cash.
This was simply the amount of funding available divided by the monthly cash outflow.
If there was £80,000 in the bank and the business was using £20,000 of it a month, the cash burn was 4 months. If nothing changed, then the following month, it would be three months as the cash would have dropped by £20,000.
This meant that an end date could be calculated. If your cash burn at the end of April was 4 months, then everything was over by the end of August unless:
a) the net cash used changed for the better;
b) more money was invested into the business to give it an extended life.
It’s simple arithmetic that halving the burn rate, from £20,000 to £10,000 per month extended the life of the business. The £80,000 = 4 months became 8 months and that gave much more time for bright ideas to be thought about, implemented and improved before the crunch.
The Break Even Point
For more complicated businesses that actually have sales, it’s a but more difficult to understand what’s going on.
To “break even” means that the business is neither making a profit or loss and it’s a starting point to aim for.
You need to understand break even analysis (links to a list of articles on this website) and the two articles to start with are:
Your current level of losses is similar to the cash burn rate and can be used in a similar way to estimate the life of the business.
Moving Towards the Break Even Point
In the traditional analysis, there are three ways you can move towards break even.
- You can sell more volume;
- You can increase the contribution rate that’s the difference between the selling price and the variable costs. You can do that either by increasing selling prices or reducing costs by reducing buying prices or by reducing the quantities of inputs used or wasted;
- You can reduce your fixed costs (also known as overheads).
An alternative way to think about the first two items, which might give you more ideas is to base it on the 3 Ways To Grow A Business model.
- You can get more customers; (more volume)
- Who can buy more often; (more volume)
- And give you a bigger profit margin per transaction (higher contribution).
It can be helpful to keep thinking about the underlying factors. So for example, you can take the “more customers” issue and, if you have a business that receives enquiries, you can see that new customers depends on the factors of getting more leads and increasing the conversion rate between leads and buyers.
If you have more of a retail business, you can think in terms of the people walking past your site, those who come in to take a look, those who buy something and those who buy a meaningful amount.
Challenge The Unchallengeable
There’s a saying that goes along the lines of “successful business owners do what unsuccessful business owners don’t do.”
Often there are things that we don’t want to do but we might have to do them if we’re going to be successful.
This blind-spot might be about marketing and promoting your business. Plenty of professionals don’t like the idea of selling themselves.
Or perhaps it’s the issue of getting financial control. Of being up-to-date with your accounting records, understanding what your margins are, doing a bit of cash flow planning.
Or it might be the issue of being different from your competitors. Being different feels scary but it’s only by being different that you can give customers a meaningful reason why they should buy from you.
The Insolvency Issue
A business can’t lose money for ever and eventually it will become insolvent and fail unless it can be turned around.
There are two main definitions:
- The balance sheet test – does the business have positive equity. It it’s a limited company, that’s the amount of share capital plus accumulated profit or loss. In this situation the liabilities of the business will be greater than its assets.
- The cash flow test – can the business meet its liabilities as they fall due.
Businesses can slip into these situations on a temporary basis and trade themselves out of trouble but, if things look more permanent, the business should consider formal insolvency and should talk to an insolvency practitioner.
If you’re in the UK, this will be helpful >>> Options when a company is insolvent (on the gov.uk website)
Getting Advice From Me
If your business is based in the UK and you don’t believe that your business is in the formal insolvency stage yet but it needs a turnaround, I offer a free Business SOS consultation which is a 60 minute talk on Skype or the telephone.