Startup Losses And Cash Burn. What’s The Difference?

Every new business will lose fresh money. This has to be taken as a ‘given.’ Making a planned loss is never a problem. Making an unplanned loss and then having to try and justify it is a huge problem.

Most entrepreneurs tend to look only at the rosy and the optimistic picture, without recognising the problems that will be faced and without factoring in a number of unplanned costs that will be incurred. In spite of the company growing in high double digits, an entrepreneur is always on the backfoot with the board of directors because he/she has not met the overaggressive business plans. No amount of growth over the past year is relevant if one has not met the budgets. This will always frustrate the management team of a company at most board reviews.

It is important for every entrepreneur to understand that making money is not going to be easy. Don’t believe for a second that revenues will instantly start coming in and customers will start flocking around to buy your products. The reality is totally different, and you will fare much better if you understand that and plan for it beforehand, rather than get surprised later.

It is better to plan for losses and state that in your business plan. When monthly reviews are held with the board of directors, it is always better to explain how you have over-achieved your numbers instead of taking high targets initially and explaining negative variances each month.

Always remember that it is easier to ‘under-promise and over-deliver’ rather than ‘over-promise and under-deliver.’ The wise thing to do is build a ‘stretch’ in the business plan, which will give you the cushion you need to handle any contingency.

No one likes to lose money and yet, it is a well-recognised fact that most new businesses will lose money. Some businesses will lose money for longer periods than others because of the nature of the business, and retail businesses have very long gestation periods. Don’t feel ashamed if your business is losing money, as long as you can see the light at the end of tunnel.

All businesses will burn money and it is necessary to have sufficient funds in the bank to meet the burn. Most entrepreneurs and start-ups should plan for their losses and understand what the monthly burn is likely to be – so that at no stage the business will run out of funds.

‘Cash burn’ should be defined as the amount of money that is committed to be spent each month, irrespective of whether or not a business is generating any cash flow. This is also the amount that is required to be put in every month to meet the cash losses of the company. These expenses are for basic necessities such as salaries, rentals, utilities and communication costs, as well as for requirements of a capital nature such as store build-out and fixed assets.

All businesses will be confronted with several unplanned costs, which will throw the entire cash planning out of gear. That is when the entrepreneur will have to scramble to raise additional funds.

The author is the chairman of Guardian Pharmacies and the author of the bestselling books, The Corner Office and The Buck Stops Here. Twitter: @gargashutosh