Spending Efficiency
Published by:
Salem Washeely
Spending Efficiency
By: Salem Washeely
Many entrepreneurs look at the absolute value of cash burn and make the argument whether they are burning a lot or closed to nothing in stand alone format or in comparison to cash balance. I believe this method has a fundamental problem with it as it focuses on one number in isolation to many drivers that affect the financial health of the startups and stands in the fact of achieving critical growth milestones.
Looking at burn, I am making the argument here that burn has to be measured in relation to investment or spending efficiency. Low burn with insignificant growth is not what VCs are looking for. VCs are looking for exponential growth driven by very efficient burn. This is the core driver behind investing larger sum of money every certain period of time to push further efficient growth.
I want to make an argument in this blog that efficient burn is driven by different factors which are:
1. Cost Structure; meaning that the higher the variable cost portion of overall cost build in any startup, the better. This is the reason as it is behind the exponential growth we have been talking about.
2. Turnover; so increasing the return from an investment in signing up customers and engaging them. This is one of the critical factors and has a significant multiplier effect. With turnover of >1, every single growth Riyal spent here will have significant impact on growth and key financial metrics.
3. Sales cycle; definitely the shorter the better which goes without saying. What is usually not obvious until you release the product to the market is how valuable your product is to the targeted customers. the more valuable the product, the less time a corporation or a consumer is going to take to convert.
4. Deployment time; here shows the power of automating on boarding process. The easier and more user friendly a product is, the faster you ripe the benefit of a contract. That is why web based SaaS solutions with online is a genius model.
5. Working capital; the less amount tied up with your customers the better. Without sufficient funding or availability of accessible and affordable WC facilities, this has to be watched out for.
I have developed a simple excel sheet here to show the relation between all these factors and how they affect the bottom line of how much cash you will end up with and how much growth achieved using the investment raised. I understand that these factors depend on the industry you are operating in and how you address it with your business model and it is not easy to just fix them with a magic stick. However, it is also part of the drivers that made disruptive companies last for long.
By: Salem Washeely
Many entrepreneurs look at the absolute value of cash burn and make the argument whether they are burning a lot or closed to nothing in stand alone format or in comparison to cash balance. I believe this method has a fundamental problem with it as it focuses on one number in isolation to many drivers that affect the financial health of the startups and stands in the fact of achieving critical growth milestones.
Looking at burn, I am making the argument here that burn has to be measured in relation to investment or spending efficiency. Low burn with insignificant growth is not what VCs are looking for. VCs are looking for exponential growth driven by very efficient burn. This is the core driver behind investing larger sum of money every certain period of time to push further efficient growth.
I want to make an argument in this blog that efficient burn is driven by different factors which are:
1. Cost Structure; meaning that the higher the variable cost portion of overall cost build in any startup, the better. This is the reason as it is behind the exponential growth we have been talking about.
2. Turnover; so increasing the return from an investment in signing up customers and engaging them. This is one of the critical factors and has a significant multiplier effect. With turnover of >1, every single growth Riyal spent here will have significant impact on growth and key financial metrics.
3. Sales cycle; definitely the shorter the better which goes without saying. What is usually not obvious until you release the product to the market is how valuable your product is to the targeted customers. the more valuable the product, the less time a corporation or a consumer is going to take to convert.
4. Deployment time; here shows the power of automating on boarding process. The easier and more user friendly a product is, the faster you ripe the benefit of a contract. That is why web based SaaS solutions with online is a genius model.
5. Working capital; the less amount tied up with your customers the better. Without sufficient funding or availability of accessible and affordable WC facilities, this has to be watched out for.
I have developed a simple excel sheet here to show the relation between all these factors and how they affect the bottom line of how much cash you will end up with and how much growth achieved using the investment raised. I understand that these factors depend on the industry you are operating in and how you address it with your business model and it is not easy to just fix them with a magic stick. However, it is also part of the drivers that made disruptive companies last for long.
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