In our last episode of 5 Minutes on Creative Entrepreneurship, we continued our “Shark Tank Series” by considering the step costs involved in scaling up a creative business. Because these costs are so disproportionally burdensome to early stage creative startups, learning how to project and plan for these costs is an essential skill to master. One of the metrics needed to calculate your step costs is the “burn rate” of your creative practice. Keeping a careful eye on your burn rate can make the difference between managing growth on your way to success, or crashing spectacularly when you reach the end of your runway, never having gained sufficient momentum to take off.
Are you ready to take the struggle out of finding new clients?
When a founder goes on Shark Tank they are looking for capital to help them make their business idea into a reality. Some founders are still in their early stages, not yet having produced a real product—they may need considerable capital to turn their idea or prototype into a real manufactured product ready for sale. But depending on how long it takes to get there, and how much money they’ll need before getting to market, they may end up burning through so much money that investors opt out before things ever have a chance to get started.
For the creative entrepreneur, you don’t have the luxury of accessing venture capital to fund the early stages of your business growth. You have to scale solely through the revenue you earn. But as we’ve been learning over the past few episodes, there are real risks involved in over leveraging your practice, or failing to forecast the step costs involved in your growth. And while you may see increases to your revenue as you gain more and more new clients, each of the projects you take have real costs involved in capturing that revenue. Your projects have a “burn rate.” And if you burn through resources faster than you can produce the work, you’ll be in just as bad a situation as the startup whose costs to get to market become a barrier to ever getting there.
And so as creative entrepreneurs we need to always make sure that our burn rate stays well under our positive cash flow. But keeping track of that can be quite complicated. Especially when we receive large milestone payments prior to earning that revenue. If you have multiple projects going on at the same time, the cash flow, and burn rate puzzle gets even more complicated. Sometimes a firm can go years at a time slowly eating through revenue, with burn rates higher than their profit margins, but they cover the burn by adding more revenue from additional new projects. This just kicks the burn down the road, and slowly digs the firm deeper into resourcing debt.
The solution to this problem is to have a document that carefully projects your revenue alongside all your expense projections to correlate your cash with the expenses needed to earn it over time. When you track this carefully it will reveal any fundamental flaws in your profitability, and expose where your burn rates are higher than your revenue capture rates.
In the startup world, investors perform “due diligence” before finalizing an investment deal. Part of that process is to review the startup’s “pro forma.” A pro forma simply is a projection showing the money they will need over time before they get to profitability. A cash flow projection is the creative entrepreneur’s pro forma. And it’s an essential tool for managing the short term financial health of your practice.
Of course creatives are not typically very good at financial modeling and projections. That’s why I’ve created a sample cash flow Google Sheet and produced a couple of training videos to help creative entrepreneurs gain this important skill. You can find these resources at holter.com/cashflow.
I hope you have a chance to check these out and learn to measure your burn rate, so that you, as the sole investor in your business, don’t end up getting burned by a flawed investment.
Until next week: don’t let the business of creativity overwhelm your creative business.