Rule 16: Tracking your burn rate keeps you from burning up

Startups often fail simply because they run out of cash. Your idea may be a winner, but if you can't make payroll or pay the lease, your business will go up in flames. That's why you must keep track of your "burn rate" -- the rate you're burning through cash. This is true for any startup, but it is especially true for Internet companies, given the uncertainty of revenue and the need to ramp up with astonishing speed (and spend lots of your investors' money in the process). Michael Wolff's book about the failure of his Internet venture is titled Burn Rate for a reason.

The traditional income statement, with revenue and expenses recorded on an accrual basis -- as they are incurred and earned doesn't cut it for startups, since it doesn't tell you how much cash you'll have on any given day. Will you have the cash to operate the business tomorrow? The next day? Next month? The cash flow report tells you where you got your cash (your brother, VCs, credit cards) and where you spent it (late-night snacks, plane tickets, PCs). The cash-flow projection estimates the flow of cash in and out, based on when you pay your bills, when checks arrive from investors, and whatever else you've got in the pipeline.

Growth requires lots of spending, generally before the revenue arrives. It's a weird balancing act, you've got to monitor the burn rate, but at the same time, you can't just stop spending."