The secret to sustained growth and smart decisions? It lies in understanding your cash burn rate. By analysing this metric, you can accurately assess cash flow, optimise resource allocation, and make more strategic choices to help achieve your growth
You need cash for your business to operate, but you also need to analyse how you use it and at what rate you’re burning through it in order to accurately forecast for the future. Understanding cash burn and calculating your burn rate puts you in a powerful position for growth.
Need help with visibility over your cash burn? Keep reading.
A cash burn rate is the speed at which you spend the available cash in your business, and your cash reverses. So if you’re spending money more quickly than you’re making it, you’ve got a problem.
You need a healthy cash flow for sustainable business growth — and you need to be able to demonstrate robust spend control to any investors you have. So, it’s best to get ahead when it comes to calculating, understanding, and optimising your burn rate.
Ultimately, your cash burn rate will tell you how long you’ve got until you run out of finances. And you need this vital info at all times to forecast business expenses accurately and make informed financial decisions.
But there’s good news, by monitoring your burn rate you can prevent your organisation from facing cash flow issues down the line. This means you won’t have to consider downsizing operations, which can mean selling off commercial assets and making difficult firing decisions.
To work out your cash burn rate, you’ll need to subtract your monthly cash inflow (e.g., revenue, funding, or tax refunds) from cash outflows (e.g., wages, rent, interest for loan repayments) and divide it by the number of months in the period you’re looking at.
Here’s a simple formula to calculate your burn rate:
Burn Rate = (Starting Balance - Ending Balance) / Number of Months
As a guide, according to angel investor Marjorie Radlo-Zandi, if you’re Seed-stage or Series A-stage, you should have at least 12-18 months of runway (time you have left before you run out of cash).
To find out your organisation’s runway, subtract your starting cash balance from your monthly burn rate:
Runway = Beginning Cash Balance / Monthly Burn Rate
Knowing your burn rate and your runway empowers you to make informed business finance decisions. It helps you plan for the future and forecast accurately, which is necessary if you want to scale.
The concept of cash burn might seem complex, particularly if you’re just starting out and you don’t have the internal skillset to lean on to answer your questions. If you’re looking for further clarity, seek professional accounting advice so you understand where your business stands financially.
To manage cash burn effectively, it’s not just about cutting costs, it’s about assessing how you’re spending.
If what you’re spending adds demonstrable business value, then it’s essential you don’t cut down on these expenses. You need transparency, visibility, and accountability to make impactful business decisions, and cash burn rate can help you with that.
Here are four strategies to reduce burn rate:
Don’t just leave cash flow statement analysis to a once-yearly task; build it into your regular processes.
You need complete transparency with business financial health. There’s no point hiding figures or discounting spend, even if it’s minute. Every penny counts, and to gain a full picture of your company’s financial health, you need to know what you’re spending and what you’re spending it on.
Tracking and controlling expenses should be a priority for any business — particularly if you want to scale. But to do this, you need to set realistic financial budgets. After you understand your current financial situation (i.e., cash burn, runway, and cash flow), you can start allocating spend to certain team members or departments based on their needs and your cash reserves.
Chances are, you’re probably paying for subscriptions you no longer need or use, or you could be paying twice for the same product or tool. According to a SaaS trends report, companies have an average of 3.6 duplicate apps. Or maybe you’re paying for two different tools that do the same thing. It’s this kind of cost-saving exercise that could save you money you can then redistribute to more add-value investments.
By increasing your revenue, you’re increasing your cash inflow, which can help offset cash flow issues and decrease burn rate. To increase revenue, consider increasing product or service prices, renegotiate supplier contracts, or implement customer retention programs.
Having a streamlined solution for corporate expense management (like Payhawk) can also help you take better control of your burn rate, optimise business finances, and grow sustainably.
By understanding your cash burn rate, you can better manage your business finances, which means making smarter, more informed growth decisions.
And that’s where Payhawk comes in. Our expense management solution gives you ultimate visibility into your spend habits and the tools you need to reduce your burn rate — set spend limits, enforce spending policies and gain a clearer picture of the overall financial health of your business so you never burn through finances at an unmanageable rate.
Payhawk integrates with leading accounting software, including QuickBooks, Xero, and ERP systems such as Netsuite and Microsoft 365, to make your expense management and accounting experience 100% seamless.
See Payhawk in action and take control of your burn rate, book a demo.
Trish Toovey works across the UK and US markets to craft content at Payhawk. Covering anything from ad copy to video scripting, Trish leans on a super varied background in copy and content creation for the finance, fashion, and travel industries.