Catalyst Pathways – The Importance of Cash Burn
Most crises can be solved by implementing a well-defined plan of action.
As with any plan of action, certain steps may have greater importance or impact than others.
When attempting to affect a turnaround of a stock under $5, the most important step or variable of the turnaround plan revolves around cash burn.
What Is Cash Burn?
Cash burn is simply how much money a company spends each quarter.
Knowing your cash burn rate allows the company to calculate the operating runway ahead.
For example, say a company has $100M on the balance sheet.
Operating expenses (OPEX) is $25M per quarter, essentially cash burn.
Therefore, the operating runway is 4 quarters (100M / 25M) or roughly one year.
Why Is Cash Burn and Operating Runway so Important?
Simply put, the cash burn and operating runway represents how much time the management team has to affect a given turnaround.
Remember, the turnaround runway is always shorter than you think, and shrinks with each passing quarter that cash burn goes un adjusted.
If the operating runway is calculated to be 1 year, then the turnaround runway is half of that, or about six months.
Why Is Cash Burn So Hard to Change?
Adding people and resources to grow a system is extremely easy. Removing people and resources from a system is immensely difficult.
Management teams can struggle to identify the right people to cut, the right systems to eliminate, or the right processes to drop in order to be more efficient and spend less cash.
Never has anyone said, “I love austerity!”
Hence the need for discipline, hard work, and patience to affect a turnaround.
What Is the Benefit of Getting Cash Burn Correct?
Successful and appropriate adjustments to cash burn extends the operating runway in turn buying management more time to affect a turnaround in stock price.
Given that the turnaround runway is always shorter than believed, M&A at a small premium can often represent a grand slam outcome for all involved!
Wishing you an epic Wednesday!
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