Burn Rate

Burn Rate and Cash Monitoring

            Burn Rate is a dot-com era term used to describe, in financial terms, the various stages a startup company goes through before achieving profitability while concurrently maintaining a sustainable level of operating cash. To be self-sustainable is to be working with net positive cashflows. Achieving this level makes the case easier for future funding efforts if additional resources are needed for the next level of growth. Unfortunately, many businesses operate in a manner in which their setup and continuous operations lead to a cash zero date certainty. Therefore, it is best to understand the burn rate and aggressively design the business to defeat the burn rate and achieve sustainability as to make the next funding round an option for business growth instead of a matter of survival.

            Burn rate therefore, measures the company’s sustainability and how practical it may be to invest into it. It is best then, to focus on solving the operating cash cycle throughout the financial periods. I offer a spreadsheet analysis on this topic in Fig 1.

		Sustainable	Unsustainable
Operating revenues cash receipts:
	Beginning revenue-driven receivables $	500,000	500,000
	Sales, both cash and credit on income statement	5,000,000	2,500,000
	Total	5,500,000	3,000,000
	Less ending revenue-driven receivables	600,000	600,000
	Total	4,900,000	2,400,000
	Add ending balance of unearned revenues (a)	50,000	50,000
	Total	4,950,000	2,450,000
	Less beginning balance of unearned revenues	100,000	100,000
	Cash collected for revenues (b) $	4,850,000	2,350,000
Cash paid for cost of goods sold:
	Ending inventory $	400,000	400,000
	Cost of goods sold on income statement	3,000,000	3,000,000
	Total	3,400,000	3,400,000
	Less beginning inventory	350,000	350,000
	Total	3,050,000	3,050,000
	Add beginning inventory-related payables	200,000	200,000
	Total	3,250,000	3,250,000
	Less ending inventory-related payables	150,000	150,000
	Cash paid for cost of goods for resale $	3,100,000	3,100,000
Cash paid for any expense:
	Beginning accrual $	15,000	15,000
	Any expense on income statement	40,000	40,000
	Total	55,000	55,000
	Less ending accrual	10,000	10,000
	Total	45,000	45,000
	Add ending related prepaid amount, if any	10,000	10,000
	Total	55,000	55,000
	Less beginning related prepaid amount, if any	5,000	5,000
	Cash paid for expense item $	50,000	50,000
Notes:
	a Customers Advance Payments
	b Whether Earned or Not
	Burn-Rate
	Gross	3,150,000	3,150,000
	Net	1,750,000	(750,000)
	Positive Cash Flow/ (Burn Rate) - Per Month	145,833	(62,500)
	Cash Reserve	1,000,000
	Sustainable for xMonths - 1 Month		-15

Figure 1. Sustainable versus Unsustainable

            In the sustainable business case, the business operations result in a net positive cash accumulation of $145.8K per month. Developing a business case to invest for business growth is an easier task than the unsustainable business case. In the unsustainable business case, which might be correctable, operations must focus on course correction. This business has a cash burn rate of $62.5K per month which if left unchecked means that its $1M cash reserve will be consumed in 16 months. In its 15^th month, if not corrected, will need to be well on its way in executing its exit strategy.

            The concept of burn rate, while useful as a tool for past performance over a set of periods, for instance, the last 12 months, would also be useful as an operational dashboard gauge. For one of our clients, this tool became the means in which cash consumption versus cash reserves and operating cash balance was monitored. With cash being king, this gauge can become useful in setting operations decisions.

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Insightfully yours,

Robert Majdak Sr, Co-Founder

Crystal Majdak, Co-Founder

Management Insights Team