Calculate and reduce your cash burn in 7 steps

Nearly 90% of start-ups fail due to a poorly managed cash burn rate that depletes their cash flow (source: Forbes). Understanding and controlling the burn rate is essential to your startup's survival.

Definition of cash burn

Le cash burn, ou " burn rate "means speed to which a startup spends its treasury before achieve profitability . Le cash burn mensuel ou cash burn rate specifies how many cash are c onsumed each month.

Why monitor your cash burn?

Monitoring cash burn is vital for a start-up, because it represents the time remaining before running out of cash . This is a key indicator of how long you can continue your business. without additional income .

Rigorous monitoring helps to anticipate future financing needs and avoid unpleasant surprises that could jeopardize business continuity.

How do you calculate cash burn?

The formula for calculating the monthly cash burn is relatively simple:
Monthly Cash Burn = (Cash at beginning of period - Cash at end of period) / Number of months in period

Let's take the example of a startup selling SaaS:

• Cash and cash equivalents at January 1: €1,250,000

• Cash and cash equivalents at December 31: € 680,000

Then the calculation is: (1,250,000 - 680,000) / 12 = (1,250,000 - 680,000) / 12 = (1,250,000 - 680,000) / 12 = (1,250,000 - 680,000) 47 500 € the cash burn mensuel

What's the difference between net and gross cash burn rates?

Le net cash burn rate corresponds to the total cash and cash equivalents that a startup consumes each month after taking into account the income generated. On the other hand, the gross cash burn rate only takes into account total expenses, not income.

If a startup spends 50,000 euros a month and generates 20,000 euros in revenue :

• His net burn rate is 30,000 euros

• His gross burn rate is 50,000 euros

What is a good cash burn?

Un bon cash burn is the one who is aligned with your startup's business plan which allows reach the next round . Usually, a good cash burn represents 1/24th of cash or less indicating a runway at least two years old .

Un higher cash burn involves more frequent fund-raising This can be restrictive and lead to significant dilution of the associates.

What is the runway and how can it be lengthened?

The runway is the length of time a startup can operate before running out of cash, calculated by dividing total cash by cash burn. To extend the runway, either increase cash flow or reduce the cash burn rate.

Runway = Total Available Cash / Monthly Cash Burn

If a start-up has 120,000 euros in cash and a cash burn of 10,000 euros per month, its runway is 12 months. Reducing the cash burn to 8,000 euros would lengthen the runway to 15 months.

How to reduce cash burn?

1. Financing your cash flow with Hero

Thanks to Hero Cash startups can benefit from immediate liquidity which is ideal for managing cash burn proactively. Visit factoring solution from Hero adapted to startups, not only speeds up cash receipts (and therefore reduces cash burn), but also strengthens customer relations through secure, early payments.

• Identify unnecessary expenditure

Review all expenses et eliminate those that are not crucial .

• Postpone non-essential investments

Examining the investment plan and postponing less urgent investments a startup can decrease son cash burn et expand sound runway without compromising its core operations.

• Refinancing debts

Consolidate existing dettes or the refinance on more advantageous terms to reduce monthly payments.

• Raising funds

Increase cash flow by raising capital or by other means of raising equity capital .

• Moving to a revenue-based financing debt model

Adopt flexible financing models such as revenue based financing In this case, payments are linked to sales, reducing cash burn in periods of slow sales.

• Reduce payroll

Although difficult, the r eduction in payroll may be necessary for a start-up seeking to minimize its cash burn and preserve its liquidity following reduced growth prospects.

Other ratios in addition to cash burn

In addition to cash burn, other financial ratios are essential for startups:

• Cash Ratio

It measures the liquidity and the capacity of a company repay its short-term liabilities with its most liquid assets.

Cash Ratio = Liquid Assets / Current Liabilities

• WCR (Working Capital Requirement)

WCR indicates the capital required to cover the company's current operating needs.

WCR = Inventories + Accounts receivable - Accounts payable

These ratios, combined with cash burn monitoring, give a complete picture of a startup's financial health.

Rigorous management of financial resources enables us to anticipate financing needs and ensure efficient use of capital. For startups, this means extending their runway, a key factor in controlling their growth. cash burn .

Frequently asked questions

How do you calculate cash burn for a specific period?

To calculate the cash burn for a specific period, subtract the end-of-period cash flow from the start-of-period cash flow and divide by the number of months in the period.

What actions can rapidly reduce cash burn?

To reduce cash burn quickly, eliminate non-essential expenses, renegotiate contracts with suppliers and optimize internal productivity.

How does cash burn affect investors' investment decisions?

A high cash burn can worry investors about long-term viability, while a well-managed cash burn can reassure them about the startup's financial health and growth strategy.

What impact does a cash burn have on a startup's valuation?

A controlled cash burn can maintain or even increase a startup's valuation, as it indicates prudent and strategic financial management.

When should a startup worry about its cash burn?

A startup should worry about its cash burn if the runway falls below the desired period between two fundraisings, signaling an imminent need for additional financing.

Other articles on the same subject:

• Start-up financing: the 8 best solutions

• The different sources of financing for a company