How to Calculate Cash Burn From a Cash Flow Statement
Accurately measure your business's cash usage by analyzing its financial statements. Gain crucial insights into your company's financial stability and operational runway.
Cash burn represents the rate at which a company expends its available cash reserves over a specific period, typically measured monthly. This metric indicates the net amount of cash a business utilizes to cover its operational expenses and investments, especially when it is not yet generating sufficient revenue to achieve profitability. For startups and rapidly expanding companies, understanding and monitoring cash burn is essential for financial stability. It helps businesses anticipate future funding needs and manage their financial resources effectively.
What is a Cash Flow Statement?
A cash flow statement is a financial report that provides a detailed overview of all cash inflows and outflows within a company over a specific accounting period. Unlike an income statement, which uses accrual accounting, the cash flow statement focuses solely on actual cash movements, offering a clear picture of a company’s liquidity. This statement helps assess a company’s ability to generate cash to sustain operations, invest in growth, and meet financial obligations. It is a fundamental component of a company’s financial statements, alongside the balance sheet and income statement.
The cash flow statement is typically organized into three primary sections: operating activities, investing activities, and financing activities. Cash flow from operating activities reflects cash generated or used from a company’s core business functions. This includes cash receipts from selling goods or services and cash payments for expenses like supplier invoices, employee wages, rent, and taxes.
Cash flow from investing activities details cash movements related to the acquisition and disposal of long-term assets. This section includes cash used to purchase property, plant, and equipment, as well as cash received from selling such assets or investments in other companies. Cash flow from financing activities reports cash inflows and outflows associated with debt, equity, and dividends. Examples include cash received from issuing stock or borrowing money, and cash paid out for loan repayments, dividends, or stock repurchases.
Identifying Key Cash Flow Components
When calculating cash burn, the focus primarily shifts to cash used in operating and investing activities, as these sections reveal how much cash a company is consuming for its core business functions and growth initiatives. Cash used in operating activities represents the ongoing expenses required to run the business, such as payroll, utilities, and general administrative costs. A negative figure in this section indicates that core operations are consuming cash rather than generating it.
Cash used in investing activities reflects expenditures on long-term assets necessary for expansion or product development, like purchasing equipment or technology. For many growing companies, particularly startups, these investments are essential for future revenue generation and market positioning. Therefore, cash outflows for these activities are considered part of the overall cash consumption for growth.
Financing activities are generally excluded from a standard cash burn calculation because they represent how a company obtains funding, not how it uses cash for its day-to-day operations or investments. While cash inflows from issuing new shares or taking on loans increase the total cash balance, they do not reflect the rate at which the business consumes cash through its core operations and growth. Similarly, cash outflows for debt repayments or dividend distributions are a result of past financing decisions. Therefore, for assessing the rate of cash consumption for business activities, the focus remains on operating and investing cash flows.
Calculating Cash Burn
Calculating cash burn involves combining the net cash flows from operating and investing activities, as these represent the cash consumed by a company’s core business and growth investments. The formula for cash burn is typically the sum of the absolute values of net cash used in operating activities and net cash used in investing activities. This approach provides a clear picture of the total cash outflow dedicated to sustaining and expanding the business.
To illustrate, consider a hypothetical cash flow statement for a quarter. Suppose the company’s “Net Cash Used in Operating Activities” is $150,000, indicating that its daily operations consumed this amount of cash. Further, assume “Net Cash Used in Investing Activities” is $75,000, reflecting cash spent on acquiring new equipment or technology for growth. To determine the total cash burn for the quarter, these two figures are added together.
In this example, the cash burn would be $150,000 (operating) plus $75,000 (investing), totaling $225,000 for the quarter. To find the monthly cash burn, this quarterly figure is divided by three, resulting in a monthly cash burn of $75,000. Regularly calculating this metric allows a company to track its cash consumption over time and make informed decisions about spending.
Understanding Your Cash Burn
A positive cash burn figure indicates that a company is spending more cash than it is generating from its operations and investments, meaning it is actively consuming its cash reserves. This is a common scenario for startups and growing companies that are investing heavily in development, market expansion, or infrastructure before achieving consistent profitability. Monitoring this figure helps management understand the rate at which cash is being used and how long existing funds will last.
Understanding cash burn is directly linked to determining a company’s “runway,” which is the amount of time a business can continue operating before running out of cash, assuming its current burn rate remains constant. The runway is calculated by dividing the company’s current cash balance by its monthly cash burn. For instance, if a company has $450,000 in cash and a monthly cash burn of $75,000, its runway would be six months.
Analyzing cash burn over time, such as monthly or quarterly, helps identify trends and allows for proactive financial adjustments. An increasing burn rate might signal a need to re-evaluate spending or seek additional funding, while a decreasing rate could indicate improving financial efficiency. The significance of a particular cash burn figure is always relative to the company’s stage of development, its industry, and its strategic objectives. A high burn rate might be expected for a company in an aggressive growth phase, but it would be a concern for a mature, established business.