Controlling cash burn in 2024: New strategies and tips

The importance of cash burn and effective expense management

You need cash for your business to operate, but you also need to analyze how you use it and at what rate you’re burning through it 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.

What is a cash burn rate, and why is it important?

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 demonstrate robust spending control to any investors you have. So, it’s best to get ahead when it comes to calculating, understanding, and optimizing 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.

Four examples of cash burn in different scenarios

Cash burn can vary significantly across different businesses and scenarios. Here are several examples illustrating how it manifests in various contexts:

1. Tech startup: A startup spends $50,000 monthly on product development and marketing but earns only $20,000 in revenue. The cash burn rate is $30,000 per month.
2. Retail expansion: A retail business expanding to new locations incurs costs of $100,000 monthly while making $70,000. The monthly cash burn is $30,000.
3. Manufacturing scaleup: A manufacturing company invests $200,000 in new equipment and facilities, resulting in a monthly operating cost of $100,000. With initial monthly revenues of $60,000, the cash burn rate is $40,000.
4. Seasonal business: A tourism business earns $150,000 during peak seasons but only $30,000 per month during off-seasons. With steady off-season costs of $50,000 per month, the cash burn rate during these periods is $20,000.

These examples highlight the importance of understanding and managing cash burn to maintain financial health and sustainability.

The consequences of a high burn rate

A study by QuickBooks found that 61% of small businesses struggle with cash flow. And cash flow struggles can leave you unable to pay bills, rent, wages, and other crucial business expenses.

But there’s good news, by monitoring your burn rate, you can prevent your organization 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.

Five Steps to Effective Cash Burn Forecasting

Forecasting cash burn is essential for business sustainability and planning. Here’s how you can effectively predict your company's cash burn in five steps:

1. Calculate monthly expenses: Sum up all expected monthly expenses including operational costs, salaries, rent, and other overheads
2. Estimate monthly revenues: Project your expected monthly income based on past trends and current market conditions
3. Subtract revenues from expenses: The difference gives you the monthly cash burn rate
4. Adjust for seasonal variations: Factor in seasonal changes in revenue and expenses for a more accurate forecast
5. Extend the forecast: Project the monthly burn rate over your desired period to understand long-term financial needs

Effectively forecasting cash burn enables businesses to make informed decisions, ensuring financial stability and long-term success.

How to calculate cash burn rate easily (formula)

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 organization’s runway, subtract your starting cash balance from your monthly burn rate:

Runway = Beginning Cash Balance / Monthly Burn Rate

Knowing your burn rate and 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 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.

Four strategies to help you manage cash burn effectively

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:

#1. Regularly analyze cash flow

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.

#2. Set realistic financial budgets

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.

#3. Identify cost-saving opportunities

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 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.

#4. Increase revenue without increasing expenses

By increasing your revenue, you’re increasing your cash inflow, which can help offset cash flow issues and decrease the burn rate. To increase revenue, consider increasing product or service prices, renegotiate supplier contracts, or implement customer retention programs.

How Payhawk helps you optimize finances

A streamlined solution for corporate expense management (like Payhawk) can also help you take better control of your burn rate, optimize business finances, and grow sustainably.

Here’s how:

• Track spend in real-time: Set budgets and forecast accurately for expansion and get real-time access to available funds and expenses. View upcoming spend for each entity in our Group Dashboard and check current available funds for a clearer picture of financial health.
• Automated expense management: Automatically categorize expenses and expense reports, manage subscriptions, get complete spend visibility, reimburse, track accounts payable, and more. Save time on manual and repetitive tasks and focus on value-adding business activities such as financial planning and analysis.
• Smarter, more controlled spend management: Gain a grasp of your burn rate with smart spend management. Use intelligent software like Payhawk to reinvent your business spend and manage everything under one roof for ultimate visibility. Issue Payhawk virtual cards in seconds, receive physical cards to your doorstep and empower employees to become accountable spenders.
• Subscriptions and invoices made easy: Don’t pay for unused or duplicate subscriptions or supplier invoice payments. Keep your cash under control, always.

Your next steps

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.