April 26th, 2022

KPI in focus: cash burn rate

As a founder of a startup with venture capital - or capital to start a company in general - you encounter a number of key performance indicators (KPIs) in the pre-seed or seed phase. One of the simplest KPIs is the cash burn rate (CBR). This is a figure that indicates how long it will take before the capital available at the initial point in time is no longer available, i.e. spent. In short: how much money a company consumes per unit of time (usually a month or a year), i.e. the period of time until - assuming consistently high operating expenses - insolvency threatens. It is particularly relevant for start-up companies, which usually have to make high initial investments and are additionally confronted with variable costs during the start-up phase, while there are still no or only low sales.

Here is an example: A company has 100,000 euros in total capital at its disposal and monthly expenses of 1,000 euros. The capital will then last for exactly 100 months before it is used up. If, on the other hand, the company records 500 euros in revenue, the real consumption is only 500 euros per month. The cash burn rate is thus 200 months. 

For founders, it is especially important to keep the cash burn rate in a healthy ratio. If the rate is too high, i.e. it takes too long for the money to be used up, the available capital is not being used effectively or at its full potential. On the other hand, it becomes problematic if the capital is used up too quickly, i.e. the cash burn rate would be too low. Our experience has shown that a reasonable cash burn rate is between six and twelve months, depending on risk affinity.

Even if this sounds simple up to this point, the challenge is to determine the exact cash burn rate. This requires accurate accounting, or costs that can be planned well. In a startup phase, external service providers can quickly come up with unforeseeable costs. Many agencies work on an hourly basis, whereby the scope of the project work, e.g. for a platform development, is usually not comprehensively foreseeable. 

cierra solves this problem with retainer services. For the initial phase, e.g. for a logo creation, we have also been able to calculate fixed prices and some ready-made packages consisting of the must-haves, based on our experience from past projects. This allows both sides to plan the costs accurately. However, only if no additional products are added. If additional, individual product developments are desired, this must then be recalculated according to the time and effort involved. If there is no professional project plan with specifications, which is necessary for the exact preparation of an offer, the financial planning security and efficiency would be gone. In addition, there would be the costs for subsequent planning.

Our solution 

Our solution is simple, fair and transparent: Together we determine a certain number of hours that we will work for you and your company every month. In addition, we work out a monthly plan with you, i.e. a roadmap for the coming months, in which we budget exactly which features will be implemented and when. This allows you to plan exactly when your platform will be ready for use and, in the best case, generate revenue. This approach will help you determine an accurate CBR. This way, not only you can better assess your financial situation, but also potential investors. 

If you have any further questions about the cash burn rate or other KPIs, don't hesitate to contact us. We are happy to help you! 

Tagged with: Business