A useful exercise is to review your committed spend. Sometimes this is urgently forced upon you - a major customer leaves or a major purchase is needed, but this is a useful exercise to complete on a regular basis to make sure your cashflow is in good shape, and you are making strong decisions ahead of time.
What is a Committed Cost?
- A Committed Cost is one that is agreed to on an recurring basis, it can be easy or hard to get out of, but is generally assumed to continue.
How does this compare to Burn Rate?
- Burn Rate is the rate cash is spent in the business, and includes revenue received. As revenue can fluctuate, Committed Costs stand alone to show you how much spend is coming up in the coming months.
Your Monthly Committed Spend can be a simple list or spreadsheet showing the supplier and the amount, if you pay expenses once a year, then use 1/12 of the annual figure. Alternatively you could project out a full year and include this in the appropriate month.
This can be useful (alongside Burn Rate) to monitor your cash reserves when your business is still building income to match your ongoing development expenses. This allows you to make strong decisions well ahead of time.
You’ll also know in advance what a bad revenue month means - what could potentially be deferred, and what could be cut altogether, or you need to seek new funds in the form of loans or investment - always done best ahead of time.
You can also monitor this to your bank account, to know how many months of Committed Spend you have available at the end of any particular month.
- Figure out what you’re committed to monthly, note these are GST-inclusive figures for things like Rent, Payroll, Loan Repayments, Contractors, Owners Pay etc
- Add up your bank balances
- Montitor this on an ongoing basis
- Need setup or ongoing help? Get in contact