Why the Burn Rate is a Hot Number

Quick Insight

Knowing your burn rate (aka “runway”) is critical for startups and very important for all other businesses. It helps you time when to start looking for funding and how much cash reserves to set aside.

Knowing your burn rate (a.k.a. “runway”) is critical for startups and very important for all other businesses. The burn rate is how much net cash outflow you have each month. Even profitable companies can burn cash if they are growing quickly or have a sudden business disruption. 

Existing profitable businesses can use potential burn rates to set cash reserve levels. I’ve seen businesses suddenly lose income from fires, frozen markets (remember the real estate crash?), loss of a major contract, and – yes – COVID. What is your burn rate if you had one of these happen (again)? Do you have this cash set aside to survive?

Startups need to know their burn rate to estimate when they need will need more capital/funding. Fast-growing companies also often need funding to fuel growth. The burn rate tells them when to start looking for additional funding.  If they know funding takes three months, they can start that process well before they are projected to run out of cash.

Startups have so much uncertainty about the amount of their expenses, so they want to run a “most likely” burn rate and then one with higher expenses.  There are always unexpected expenses.  Startups have more expense surprises than revenue surprises.

I wish you the cash to survive the burn. I wish you well.

- Rob Stephens

Further Insight

CFO Perspective Resources

  • Video: How to Create a Cash Flow Projection - This video walks you step-by-step on how to create starting from an easy and free template. A cash flow projection can help you identify “cash leaks” that are draining your profits, spot periods of low cash flow before they become a crisis, and know when you have the cash to capture opportunities.
  • Course: Entrepreneurial Finance - Small Business Financial Management Basics - Get a financial overview of the entrepreneurial journey from startup to operational decisions to exit planning. You’ll hear from a business banker guest speaker who explains what lenders look at when deciding whether to make a loan to a small business.
  • Course: Managing Cash Flow - This course shows you how to assess current and future cash flows. You learn techniques to increase cash flow and reduce dips in cash flow. I list critical sources of cash for businesses, along with the pros and cons of major sources.
  • Book: Conquering Cash Flow: The Complete Guide to Small Business Cash Flow Management - Learn how to manage your cash better so you can improve your cash flow, increase your profits, grow your business, and reduce your stress. Discover proven methods to conquer your cash flow.

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