What is cash burn?

When businesses are in their early stages or going through a period of rapid growth, understanding how quickly cash reserves are being spent is essential. That’s where cash burn comes into play – a critical financial metric that tracks how fast a company is using its cash. Knowing the cash burn rate helps leaders make smart decisions about funding, budgeting, and long-term strategies. 

In this guide, we’ll cover:

• Cash burn rate definition
• What is cash burn in business?
• Cash burn vs cash flow
• How to calculate cash burn rate
• What is an acceptable cash burn rate?
• How to control burn rate
• How to forecast burn rate
• How to manage cash burn effectively
• How Dojo can help
• FAQs

Cash burn rate definition

Cash burn, often called burn rate, measures how quickly a company spends its cash reserves to keep operations going. To define cash burn, you need to know how much cash is being used up to cover expenses that exceed income over a specific period.

What is cash burn in business?

Cash burn is important for startups and small businesses, which often need to invest in growth long before they turn a profit. Tracking this rate helps founders and investors see how long the business can keep running on current resources and whether they’ll need to raise more funds soon. 

It also shapes financial planning – helping businesses figure out how to stretch their cash further, adjust spending, and make better decisions to stay on track.

Cash burn vs cash flow

So, what is cash burn rate, and how does it relate to cash flow?

Cash flow measures all the money coming in and going out of a business – it shows whether cash levels are increasing or decreasing over time. On the other hand, cash burn focuses on how quickly a business is spending down its cash reserves. 

It’s possible for a company to have positive cash flow overall but still experience cash burn if expenses in certain periods outweigh the money coming in. 

How to calculate cash burn

• Figure out the cash balance at the start of the period you’re analysing.
• Identify the cash balance at the end of the period.
• Calculate the difference between the starting and ending balances.

Divide this difference by the number of months in the period to find the monthly burn rate.

Example of calculating cash burn

Let’s say a startup begins the year with £1,000,000 in cash and ends the year with £400,000. 

The cash burn rate calculation is: 

• Cash burn = (Starting balance - Ending balance) / Number of months
• Cash burn = (£1,000,000 - £400,000) / 12 months
• Cash burn = £600,000 / 12 months
• Cash burn = £50,000 per month

So, in this example, we know, thanks to the cash burn calculation, that the company is burning through £50,000 of cash each month.

What is a good cash burn rate?

A good rule of thumb is that a company should have enough cash on hand to cover 12 to 18 months of operations at its current burn rate. This helps provide a cushion for unexpected challenges or strategic pivots, and is often referred to as the cash runway.

The acceptable burn rate can also vary a lot between industries. For example, tech startups might have higher burn rates due to big investments in research and development, while service-based businesses tend to see lower rates. Comparing burn rates within the same sector is the best way to get a meaningful picture.

Essentially, it all depends on the company’s growth stage, funding status, and broader goals. A higher burn rate might be justified if it’s fuelling rapid growth, but it’s a red flag if it’s not translating into meaningful progress or revenue.

How to control burn rate

• Review spending regularly to spot unnecessary expenses and reduce waste and maximise operational efficiency.
• Negotiate better deals with suppliers or find more cost-effective options.
• Prioritise investments that directly support growth and cut back on those that don’t.
• Explore new revenue streams to offset expenses and keep cash flow positive.
• Keep an eye on hiring – scaling the team too quickly can drive up costs.

How to forecast burn rate

• Start with clear financial statements – understanding current cash flow is key.
• Use historical data to spot trends in spending and revenue.
• Build detailed financial projections that include expected costs and income.
• Factor in potential changes – like new hires, product launches, or economic shifts.
• Revisit and update forecasts often to stay aligned with current realities.

How to manage cash burn effectively

• Communicate openly with stakeholders like investors, lenders, and employees to build trust and gain valuable input.
• Improve efficiency by streamlining processes, automating tasks, or renegotiating contracts to reduce costs without sacrificing quality.
• Diversify revenue streams to reduce reliance on a single source of income, for example, expanding into new markets, launching new products, or forming strategic partnerships.