A cash burn rate is a calculation of negative cash flow and a common metric of company performance and valuation. It specifically refers to the rate at which your business spends or depletes its available supply of cash over time. In other words, your burn rate can be used as a tool to measure the amount of cash you’re spending and how quickly you’re spending it.
If a business is burning cash too fast, it risks running out of money — and possibly going out of business altogether. On the flip side, if a business doesn’t burn enough cash, there’s a chance this lack of investment in its own future will cause the business to lag behind its competitors. It’s a delicate balancing act.
Often, when a start-up is focused on growing its customer base and improving its product or service, the business may take time to generate a positive net income. In this instance, the merchant should have an idea of when profitability will be reached. That said, burn rate is an important consideration for any business at any stage, as it provides a clear insight into your financial projections on the path to profitability.
Are you aware of how much cash your business ‘burns’ or loses each month? You should know how to calculate cash burn rates for your business.
To do this, you first need to look at your cash flow statement, which takes into account cash flows from operations, investments and other activities — then reports the change in your organisation’s cash position from one period to the next. The rate of negative cash flow is usually quoted as a monthly rate, but it could be reviewed weekly in more pressing circumstances.
You can calculate both the gross burn rate and the net burn rate.
Here’s an example of how to calculate the net burn rate.
Imagine you started a financial quarter with $20,000 cash in the bank. Three months later, you have $14,000 cash in your account.
This would make your net burn rate per month $2,000.
At this burn rate, the business has seven months of financial runway before it would have no money left. Should business continue on the same trajectory, it will need to consider cutting costs or finding ways to increase revenue in that period.
The good news is your burn rate is not a fixed figure. When you make changes in your business that positively impact your income and expenses, you can in turn lower the burn rate and boost your financial position.
Here are five tips to monitor and reduce your cash burn.
Better oversight of your incomings and outgoings leads to better budgeting. At the same time, you can improve your cash flow through fast access to your takings — not to mention avoiding hidden fees and lock-in contracts.
Improving your overall expense management can therefore help improve your burn rate and eventually generate business growth. With that in mind, what can you do to ensure your business is managing its expenses in an optimal manner?
Use Zeller Mastercard — By using Zeller Mastercard for business purchases, you’re putting your money to work with a fee-free business debit card that lets you spend funds as soon as they hit your Zeller Transaction Account. With fast access to your funds, a business loan should not be necessary.
Use Zeller Dashboard — With Zeller Dashboard you can easily keep track of your expenses, and ensure more money is coming in than going out.
Please note this article is for educational purposes only and does not constitute advice.