One thing that’s very important for an emerging company to know in its early stage of life is how many months it can survive on its current capital.

That’s a critical timeline to know in order to be able to tell when the additional money has to be brought in. Without knowing this number, it could be very easy for a company to get caught in a squeeze. That inflection point could come up rather quickly. When it does happen, the results aren’t always pretty. It can mean having to make some cutbacks in operation or delaying payments to suppliers or, perhaps, not funding some product development. Instead of being on the growth track, you can find yourself in retreat mode. This is not a good posture to be in at a time when you’re looking to raise additional capital and hopefully beginning to show that you’re on an upward track. It can be a sign that you don’t have as good of control over your business and could leave some questions in the minds of the potential investor.

So take a good look at your timeline. Basically, you’d have these three components:

1. What cash do you have on hand?

2. What is your burn rate? How much cash are you requiring each month to fund the operation?

3. Divide one by the other and the end result is the number of months until you run out of capital.

Remember it usually takes longer to get the capital than you might expect. If you do find that you’re in a short squeeze, take action now rather than later to see what you can do to extend the lifeline. Is there some very quick capital on a small amount that you can bring in? Perhaps, you might be able to loan money back into the company or there could be money that a shareholder could put in. Is there some bank financing that you haven’t tapped into that might by you time, whether it be a line of credit or factoring or purchase order financing? What expenses might you be able to delay in the shorter term or are there suppliers that could give you some extended financing? What about collections? Are there some collections that you can be jumping on to pull in some cash sooner?

So now how long you have before you run out of cash and take action on it now rather than later before more serious action has to be taken or you could get yourself caught in a downward spiral.

Jon Paul, MBA, CPA, CMC, CM&AA

President, Value Added Finance Resources
Bringing new insights on results and maximizing company value