I’ve been reading the great posts on the subject of ‘burn rate’ of late and found myself nodding furiously in agreement with Marc Andreesen, Fred Wilson and others.In this age of very well (and over) funded startups, I’ve almost forgotten the Number1 piece of advice to new CEOs.
“Have your closing bank balance put on your desk first thing every morning.”
Firstly, why single out this of all the possible KPIs?Many will find this very curious piece of advice.Simply because there is no better way to have your figure on the pulse of the business by understanding the flows of cash – in and out.
Secondly, why have someone else involved. Why not just look at your on-line balance. Yes, you should do that too – to see the movements - but making it another person’s job means that 2 of you will be aware of this ultimate, most important KPI.
Most startup CEOs keep an eye on their cash only in terms of ‘length of runway’.
They also have a decent idea of their ‘burn rate’. Assuming that this number is constant and will follow the cashflow forecast done in the budget is dangerous.
Its often the case that founders tend not to look at cash balances when they have more than 12 months cash left. Its amazing how one month later, 12 month’s cash suddenly becomes 9 months (and then 6 months when closure costs are factored in)
The daily movements of cash prompt closer examination of cost and revenue areas, working capital movements, spikes in and out. Like a really good Medical Doctor who can tell the health of a patient via very few vital signs, a good CEO in close touch with his/her company’s vital signs – the most important of which is CASH..
In all but the simplest of businesses, the ‘length of runway’ is not just cash on hand divided by cash consumed in the month.
Most businesses have elements of some or all of the following: payments in advance (received and paid), security deposits, accounts receivable, payable, inventory etc.
A daily balance sheet would answer all the questions, but this is simply not a practical way to manage. The daily cash balance tells (and digging into the changes from the previous day) will tell you most of what you need to know.
Most of all, don't take your eye off the cash ball just because you've raised a chunky round.