Too many startups worry about the wrong metric. That metric is “burn rate,” or how fast they are going to run through their cash—or more likely, their investor’s cash.
Listen, you never, ever want to run out of cash. But counting off the months until you are out of cash, out of runway, and out of time isn’t the right focus. Here are five better metrics.
New Clients Obtained
One way to not run out of cash is to create more of it. The way you create cash is by acquiring paying clients (or customers if that word better suits your business).
Your burn rate starts to lose its significance when you gain new clients and customers. If days go by without your acquiring new clients, your burn rate becomes more important. If weeks pass without your winning new clients, you don’t have the right focus. Entrepreneurs create customers.
New Revenue
Yes, new revenue. New revenue is worth more to you than new investment money. It doesn’t matter how sexy investment money is, revenue is much, much sexier (and real investors think so, too). Speculator money isn’t real money.
You might start a business with investor money, but you don’t run a business with investor money. You run a business with the money you create by selling to your clients.
Entrepreneurs make money. They don’t spend investor’s money without also multiplying it.
Gross Profit
Gross profit is the money you have left after you subtract your expenses from your revenue. If you don’t have any revenue, then you don’t have any gross profit.
If you don’t have any significant revenue, then you look at your burn rate. Generating gross profit is what keeps you from having to look at your burn rate.
No business survives for long without gross profit in excess of their expenses. Investor money is not the solution to a lack of gross profit. The solution is to sell enough to generate gross profit.
Net Profit
Want to be successful? Want to be a real entrepreneur? Keep some of the money that you make.
A 5B company with no net profit isn’t as strong or as safe as a 125M company with 5M in profit. When there is a blip in the economy, the C-Suite will be removed from their posts and replaced by someone who knows how to keep a few of the 5B dollars.
Be a strong, well-run business. Then worry about scale.
Pipeline
What does your future client acquisition look like now? How many new clients will you obtain this quarter, next quarter, and this year? What will those clients pay you?
The value of your pipeline is some prediction of your future. When you look at your burn rate, you are looking at how fast you are going to kill the business. When you look at your pipeline, you are looking at how fast you are going to grow your business. It’s a focus thing.
If you are an entrepreneur, these metrics are your focus. If you believe in your idea, then focus on creating clients, not burn rate. You may even get to keep the business you started.
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