Capital Markets / Investor Relations in Two Minutes or Less
A Deeper Discussion of Why Stopping Cash Burn Is So Hard
Cash, simply put, keeps the lights on for any business.
The more cash you burn, the harder it is to keep the lights on over time.
For a turnaround situation, available cash and cash burn dictates the turnaround timeline.
Adjusting cash burn is difficult because management must remove resources from the system without breaking the business permanently.
Nevertheless, in order to affect a turnaround, management must identify costs to cut in order to extend the turnaround timeline.
Key Contributors to Cash Burn That Can Be Changed:
Each lever either lowers cash burn or adds cash to the system.
Levers that Reduce Cash Burn
People: Typically, the highest paid with shortest tenure are let go immediately. Next, management must review spans and controls across the org chart.
Systems: Are there non-essential technology systems, services, contractors, or consultants that represent a nice to have that can safely be removed from the system.
Process: Lean Six Sigma and Kaizen events become your best friend, as new more efficient processes will help offset human capital reductions.
Levers that Add Cash to the System
Asset sales: Selling an asset such as a line of business, technology, or patents, will bring a cash injection to the system, and lengthen the operating and turnaround runways.
How Quickly Do You Need to Enact Change?
Immediately represents too slow of a response. Once the investor community is aware of a liquidity situation, the stock will come under and remain under pressure.
How Much Do You Cut?
Cut enough so as not to irreparably harm or permanently impair the business!
At a minimum, aim for one quarter of expenses. Ideally, you want to cut as much as you can in order to reset the cash burn rate going forward.
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