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Liquidity Analysis: Cash Burn Rate

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Cash Burn Rate: Assessing Cash Consumption and Survival Period

1. What's the Deal with Cash Burn Rate?

Financial statement analysis is crucial, especially for startups. We're talking about the cash burn rate - it measures how fast a company is guzzling through its cash stash. It's like tracking how quickly your bank account balance is going down.

2. Crunching the Numbers: How to Calculate Cash Burn Rate

Okay, listen up, fam. To calculate the cash burn rate, you subtract the ending cash balance from the beginning cash balance, then divide it by the time period. It's like basic math, but with dollar signs.

3. What the Cash Burn Rate Tells Us

This metric reveals whether a company is financially healthy or headed for disaster. If the cash burn rate is high, it means they're spending cash like it's burning a hole in their pocket. Time to hit that panic button, folks! On the other hand, if the rate is low, they're being cautious and can last longer without fresh moola.

4. Why Startups Should Care

Hey, startups! This one's for you. The cash burn rate is super important because it tells you how long your company can survive using the cash you've raised from investors. Time to crunch the numbers and see if you're living that champagne lifestyle or struggling to keep the lights on.

5. Surviving the Burn: Tips for Startups

Alright, fellow entrepreneurs, listen up. You need to keep a close eye on that cash burn rate to avoid disaster. It'll give you an idea of how many days you can keep the party going without running out of cash. Just assume you won't be raking in big bucks during that time, relying solely on the cash you've already raised.

Example:

Let's take a peek at Startup Company XYZ:

  • Beginning Cash Balance: $1,000,000
  • Ending Cash Balance: $800,000
  • Time Period: 3 months

Cash Burn Rate = ($1,000,000 - $800,000) / 3 months
Cash Burn Rate = $200,000 / 3 months
Cash Burn Rate = $66,666.67 per month

So, in this example, Startup Company XYZ is burning through cash at an average rate of $66,666.67 per month. That's like spending your entire monthly paycheck on avocado toast!

6. Wrap It Up: The Cash Burn Rate Verdict

Now you know that the cash burn rate is a make-or-break metric for startups. It shows how fast a company is spending cash and estimates how long they can keep the lights on. A high burn rate means it's time to hustle for more funding, while a low rate buys you more time to figure things out. Stay woke and keep an eye on that cash flow, folks!

This article takes inspiration from a lesson found in FIN 689 at Pace University.