Why “Cash Burn” Matters to Investors

Young companies hungry for funding often find themselves in a difficult spot. They need a cash injection to help them grow revenue, but they need to prove their revenue potential in order to persuade investors to provide that very cash injection.

Facing this dilemma, young companies tend to present the financial viability of their companies from two angles:

  1. How they earn money

  2. How they spend money

For the first angle, these companies typically show potential investors metrics like average sales price, payback period, and the lifetime value of customers they sign up. Although still largely unformed, these metrics give investors a clear way to determine whether the company has a real shot at creating a sustainable, predictable and ample revenue stream.

But the other half of the equation can be more problematic. In their early stages, companies tend to spend a lot of money trying to educate potential customers, build a sales and marketing machine, and develop their product. Investors understand that young companies must spend a lot of cash, but it is the way that these companies spend money that is important for investors to understand. Where are they spending their money? Are they using it wisely and sustainably. How is their cash burn rate changing over time?

To answer these questions, young companies must have a good way of displaying where their cash outflows are going. But what’s the best way?

The answer is cash burn. Investors know that cash burn is an essential component in a company’s long-term outlook and that it says a lot about how long a single round of funding is likely to last. Before they even consider investing in a growing company, investors take a close look at the company’s burn rate.

Unfortunately, this is almost impossible in most bookkeeping software, including QuickBooks. So what can executives at these cash-strapped companies do?

They can get financial analytics software to help them see to the penny where their money is going. In the report below, for example, you can see the item-by-item breakdown of where the company is spending its cash.

This single chart may be the most important tool a young company can use in its quest for funding.

But it’s not enough. These companies must also understand some basic ways to measure and manage their cash burn. Our new FREE one-page guide is the perfect way for companies to do this. Download it now to learn how to prove to your investors that your company has real financial viability.