If you regularly manage your personal finances or even take stock of what you bought over the course of a few months that could be considered excess, it can be surprising to find out just how much more we spend than we have to. This is not just about necessities but also about dealing with bloated expenses where you are simply burning money.
Managing an organization can sometimes result in a similar type of situation. The burn rate for a company, especially a startup, can balloon over time if you see growth, and it can often require taking some measures to ensure the company’s financial health. Financial wellness reports help with that, and here we will talk about how they can help you decide what to do and how to achieve better financial health.
What Is the Burn Rate and Cash Bloat?
Companies are made to make money, but they aren’t always at that stage. Even if they do, sometimes one can make so much money that spending too much here and there can seem harmless, but the truth is that it only leads to problems in the long run. In some cases, it can result in the company ‘restructuring’ its operations, layoffs, and more.
A burn rate is simply the rate at which the company spends money, but a better way to describe it would be by explaining gross burn and net burn.
- Gross Burn
The gross burn is the total amount a company spends on operating costs per month. So, if you spend $50,000 every month, your gross burn rate will be 50k or 150k every quarter.
- Net Burn
Net burn refers to the total amount of money lost every month. Alluding to the previous example, you could spend $50k per month and earn $40k in revenue. That makes your net burn rate $10k per month.
Startups and new companies do not make a profit until much later, so they typically lose money when it comes to their burn rates. However, burn rate is not often an indicator of financial wellness unless it is looked at with reference to potential cash bloat a company has.
- Cash Bloat
If a company has some cash reserves or even some extra cash to spend before the end of the year, it is not necessarily something that should be spent on amenities, bonuses, or even expanding the empire. There are a lot of factors that could lead to a company having extra cash in their coffers, such as uniquely preferable market conditions or a temporary uptick in consumer interest in their products in the last few months.
These factors allow the company to see if they can bear the added expense of acquisitions or bonuses before they actually dole them out. Spending too much without considering the long-term cost can lead to cash bloat, as companies do not always grow and generate a profit. Sometimes there are bad months, quarters, or even entire years where the company has to report a net loss.
So, it is not always the best decision to splurge on some new hires after a successful year of growth unless you have the plan to generate more revenue to balance the budget or at least deal with cash bloat in the future.
Can a Financial Wellness Report Indicate the Contributors Towards Cash Bloat?
A financial wellness report is meant to tell you about your business’s current financial health. Think of it like a doctor’s report. The report will tell you which parts of the businesses are generating value and which are not, where you need to cut down on cost, and where you need to devote more attention and care.
That also means that it will likely point out management and cost bloat at a company, and that is almost inevitable if the company has grown considerably.
What is Management Bloat?
Management bloat can be seen as the same as cost bloat. If you make twice as much money as last year, you could potentially be spending three times more than you were before. Similarly, if your small company had one or two managers and about 20 people, growing twice in size can result in three to four times more managers. Growing three to four times further can result in ten times more managers!
This can significantly drive up the cost, as managers oversee production rather than actually produce anything. Other roles, such as team leaders, work with the employees, but even if managers provide regular training, there is also the matter of having a larger percentage of people doing less work at the company, which also requires higher compensation.
Essentially, management bloat and cost bloat go hand in hand, and in many cases, any type of significant growth results in some sort of management bloat at a company.
How to Avoid Cost Bloats?
You cannot get a regular doctor’s report to see your progress, but you also cannot forgo taking care of yourself until the day you get one at the end of the year or bi-annually. Similarly, a financial wellness report will probably not be provided every month, but that doesn’t mean you cannot look at your current finances with that frequency.
Doing it at the end of the year has its appeal, but treating each month as a year-end period can lead to better management, less cost bloat, and keep you on top of your finances as well. If you know what you are spending more on, you can easily avoid doing that for the rest of the year, or at least know more about it to potentially reduce the bloat in the first place.
As companies grow, they accrue more personnel over time, but that also means that they spend a lot more over time as well. Not all of that money is spent wisely, though, and as companies grow, it can lead to financial bloat and a significant amount of cash being spent that doesn’t provide any value. Financial wellness reports help you see that, and here we have talked about how they help you understand your cash burn rate and where you can avoid or reduce the bloat before too long.