How long is your cash runway?
What is cash burn rate?
Cash burn rate is the rate at which a company uses up its cash reserves or cash balance.
Essentially, it’s a measure of the net-negative cash flow.
How fast are you burning through your cash reserves? Or is your cash moving the other direction, building up a healthy balance from positive cash flow? That’s what this metric is designed to show you.
Cash burn rate is a big concern for funded startups. The typical pattern is to get funded, use that cash to build the business, and then aim to get to positive cash flow before the money runs out. This is sometimes expressed as a “cash runway.”
Cash runway is how long your cash will last at your current burn rate.
The same metric is useful for mature businesses too. How fast are you growing your cash reserve? Or, are you strategically investing that money to fund faster growth? Whatever your plans, be sure to keep an eye on this metric to make sure you are hitting your targets.
How this metric is calculated
To determine the burn rate for a selected period, you find the difference between the starting and ending cash balances for the period.
Did you lose or gain cash?
Then we divide that total by the number of months in the selected period.
The result is a monthly value.
For example, say a company started last quarter with $200K in the bank but ended with only $110K. That’s a loss of $90K in cash over three months—a burn rate of $30K per month. From a cash runway perspective, that suggests that the company now has just over three months of cash on hand. They need to reduce their burn rate and get cash flow positive soon.
To figure out your “cash runway” (how long the company has until it runs out of cash), take the rest of the money left in the cash reserves and divide it by the burn rate. For example, if there is $200,000 left and the burn rate is $50,000 per month, it will take 4 months for the company to run out of cash.
A lower cash burn rate is better
It’s often best to have a negative burn rate. That means you are building your cash reserves, not using them up. There are certainly cases where investing your cash in growth is a good idea, though: startups, obviously, but also bootstrapped companies that are trying to grow. Just make sure you plan for that cash burn and then track your progress. If you burn through your cash reserves faster than expected, you may end up in trouble.
How to reduce your burn rate
If your cash burn rate is higher than you want, the numbers to change are pretty simple. You need to increase your incoming cash, decrease your outgoing cash, or both. Here are ideas on how to do those things:
- Increase your revenue. Look for ways to boost your traffic, get more prospects into your pipeline, increase your conversion or close rates, or raise your pricing. More sales should translate into more cash coming in.
- Reduce your payroll expenses. For labor-intensive businesses, deferring new hires, laying off nonessential workers, or limiting benefits can lead to big savings. Make sure any cuts are smart and sustainable, though.
- Reduce your direct costs. For low-margin businesses, finding ways to minimize raw materials and other direct costs can make a big difference in cash flow.
- Reduce or defer other expenses. Take a close look at your budget. Are there expenses that aren’t contributing to your company’s success?
- Ditch unprofitable revenue streams. It’s not uncommon for businesses to offer secondary products or services that don’t break even. Why work for free?
- Encourage cash sales. Cash sales are great: you get the money right away instead of waiting for it. Make sure you are offering credit terms selectively and smartly, rather than just converting what would have been immediate transactions into delayed ones.
- Bill sooner and collect faster. When you do offer credit to customers, be sure to bill them promptly, clearly state the credit terms, and follow up with appropriate collection activities if they don’t pay on time. Adding late-payment charges may also help to bring cash in faster.
- Pay your bills slowly. Unless there’s a discount or other incentive for paying sooner, don’t pay your bills any faster than you have to. Take advantage of the agreed payment terms to hold onto your cash longer.
- Sell off excess inventory. Extra inventory is still valuable, but it’s not as useful as having the equivalent amount of cash. Consider offering sales promotions or discounts to sell off what you don’t need for regular sales.
- Consider using a factoring service. If you cannot get customers to pay their invoices on time, it may be worth looking into such a service.
- Hold off on major purchases. If cash is tight, that big capital expenditure may need to wait—unless it’s an investment that will start paying off right away.
- Consider refinancing debts. Using too much cash to repay debts? Check with your creditors about options to refinance with lower payments.
- Raise additional funds. If you’ve done all you can to affect your incoming and outgoing cash, but your burn rate is still too high—and, crucially, you are confident that your business can be successful—you may need to do more fundraising. Be sure to do this as early in the process as possible, since a business running low on cash may strike potential lenders as too risky.
Where to find your burn rate in LivePlan
There are a couple of ways to access your burn rate in LivePlan.
1. Once you’ve logged in to your LivePlan account and are looking at the Dashboard, click into any metric. I’ve clicked the first one on the page, “revenue.”
Now, hover over the “revenue” heading and you will see a drop down menu appears. “Cash burn rate” is near the bottom of the menu. Click it and you will be taken to the page that shows you your burn rate.
For more business concepts made simple, check out these articles on direct costs, net profit, operating margin, accounts payable, accounts receivable, cash flow, profit and loss statement, balance sheet, and expense budgeting.