What Cash Burn Means
Cash burn refers to how quickly a company spends its money. Unlike profit and loss statements that accountants create, cash burn tracks actual money leaving the company's bank account. This matters because a company can appear profitable on paper but still run out of real money to pay employees and bills.
How Companies Measure Cash Burn
Companies measure cash burn by calculating how much cash they spent during a specific period, usually one month. The basic formula is: total cash spent divided by the number of months equals the monthly burn rate. For example, if a company spent 500,000 dollars over five months, the monthly burn rate is 100,000 dollars per month. Most companies look at their bank statements and accounting records to find this number.
Why It Matters
Cash burn is critical information for startups and growing companies that are not yet profitable. By knowing their burn rate, companies can predict how long their money will last, called their runway. This helps business leaders make decisions about hiring, spending, and whether they need to raise more money from investors. Investors also watch cash burn closely to determine if a company is spending money wisely.
Types of Cash Burn
There are two main ways to think about cash burn. Gross burn is the total amount of cash a company spends each month on all expenses. Net burn is the cash spent minus any money coming in from sales or other income. Net burn is usually more relevant because it shows the real rate at which cash reserves are decreasing.
Common Mistakes in Measuring Cash Burn
Companies sometimes confuse cash burn with accounting losses, but they are not the same thing. Some expenses counted in accounting profit or loss do not involve actual cash leaving the bank, like depreciation. Additionally, companies must account for money spent on assets like equipment, which also uses cash but may not show up in daily expense reports. 
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