Calculating Your Cash Burn Rate During a Recession
You, therefore, began this year with everything planned out: a sustainable cash burn rate, a specific length of the runway, and a business plan based on both. All of a sudden, the stock market is in a downward trend, supply chain problems are reducing sales. And recession chatter is getting louder. And businesses of all kinds are implementing cost-cutting measures like hiring freezes and layoffs.
With this in mind, you should ask yourself, what will you now do?
Startups can take several actions to manage their financial situation during a downturn. But we’re going to concentrate on the basics: figuring out your new burn rate and runway.
Determining Burn Rate
Your cash burn rate balance at the beginning of the month is subtracted from your cash balance at the end of the month to determine your cash balance drop. This is how you calculate your burn rate. Your burn rate is that quantity.
You may determine how much runway your business has to operate with, or how long you have until you run out of money, by looking at your average monthly cash burn, and its trajectory. And also, the amount of cash you have on your balance sheet (and we have a burn rate calculator to help you with this).
Determine Your Burn Rate
Of course, the issue you’re now probably confronting is that the figures used in those earlier computations are now drastically shifting. While certain industries are more affected than others, almost all firms are likely to be impacted by a recession in some way.
Obtaining New Numbers
Unfortunately, it is reasonable to predict that client attrition would increase and that it will be increasingly difficult to generate new business. As a result, your top line will experience downward pressure, which will raise your cash burn even while your expenses will remain the same. Additionally, if no fresh capital is added, your financial runway will be shortened due to increased burn.
You must re-run your calculations using the updated burn rate and runway. However, we need to take a step back to obtain those figures. To account for how revenue, attrition, and spending over time will affect your burn rate and runway, you need a reliable model for forecasts. And you need to have clean books to do that.
Clean records are essential for making wise company decisions, as we’ve previously discussed. Your books are the only reliable source of information on the financial health of your business. They show you how much cash you have on hand, what your assets and liabilities are, and where your money is being spent. You can’t be sure that your financial decisions are grounded in reality if you can’t trust the correctness of your books. This has never been more crucial than it is now, given the economic situation.
How to Calculate Your New Runway
You can gather the data you require to rerun your financial models once you are certain that your books are accurate. Utilize these numbers to generate fresh revenue and churn projections based on the current market. Which will later provide you with a new estimate of the amount of money you can expect to earn. Finally, compute your burn rate for the upcoming months or years. Using that cash prediction in comparison to your anticipated expenses.
While it could be more challenging to raise money during a recession, you should generally make sure that your firm can survive for the following 24 months without receiving any extra funding.
You should think about running calculations under several scenarios given the current uncertainties surrounding the epidemic and the markets. If things keep getting worse, what would your numbers be in a month? When it stabilizes, what may they be? A sensitivity report for your current models will be useful in this situation. Here is a straightforward example that shows how the cash burn and runway for a company with $100,000 in cash on hand and $10,000 in monthly expenses alter as revenue increases.
|Monthly Revenue||Burn Rate||Runway|
|Current Revenue||$5000||$7000||16 Months|
|-10% Revenue||$3600||$6400||15 Months|
|-25% Revenue||$3000||$7000||14 Months|
|-50% Revenue||$3000||$9000||12 Months|
|-75% Revenue||$2000||$10,000||11 Months|
By conducting this type of study in advance, you may prepare for certain situations and avoid being caught off guard if the market keeps changing. You’ll be able to start deciding what your organization needs right away, regardless of what the economy means for your original plans.