What is burn rate?

Definition

Burn rate is how fast cash is leaving, stated as a monthly average. On the books, this is a reading of cash and cash equivalents over time, not a ledger account you debit and not the same number as the month's loss.

A founder-run coffee roaster reads it after cash has been falling for a stretch of months. The question is the monthly pace of that drop, not the ending balance by itself.

It is a pace, not a snapshot and not a one-period total on its own. The Balance Sheet shows what is left; this reading shows how quickly that leftover is shrinking.

Stay with the monthly average when you read it. The cash consumed in a single period, and how many months the rest will last, are later questions.

Where it shows up

Cash flow: Related to how fast cash is leaving, as a monthly average.

Balance Sheet: Related to cash going down.

P&L: Related to a loss, which is not required for cash to burn.

See also: Cash Burn · Cash Runway · Cash Position

When you look at your Statement of Cash Flows, a stretch of months that used cash is the raw material for this pace. Divide that drop by the number of months you are averaging.

When the pace is high, payroll, beans, and rent are leaving faster than collections refill the account. When it is low, the roaster is closer to covering the month from what comes in.

The Income Statement does not print this pace. Net income can be a small leftover while cash still leaves every month.

The Balance Sheet shows the cash line at each month-end. This reading is those month-ends turned into an average drop.

How it works

Pick a stretch of recent months that looks like the current operation. Add up how much cash fell from the first opening balance to the last closing balance.

Divide that drop by the number of months. A $36,000 fall over three months is $12,000 a month.

Stay with cash, not profit. Operating expenses are a common reason the pace is high, but beans bought for the shelf and an owner taking money out also count.

A leftover on the Income Statement does not reset this pace. The roaster can post a small profit and still see cash leave if wholesale invoices are slow.

A headcount plan that adds roasters will usually raise the pace, because payroll expense hits cash every cycle. Hiring is not the only driver; rent, green beans, and equipment payments sit in the same average.

Do not treat one unusual month as the pace. A large bag of green beans bought in June can make that month look worse than the three-month average.

New money from an owner or a lender can hide the pace if you only look at the two endpoints. Pull that extra cash out of the math, or the average will look healthier than operations really are.

This page stays on the monthly pace. The cash consumed in a single period, and how many months the rest will last, belong on other pages.

Example

Kiln & Cup, a founder-run coffee roaster, started April at $92,000 across checking and a small savings account. It ended June at $56,000.

Cash fell $36,000 over those three months. Divide by three, and the pace is $12,000 a month.

April through June each used cash, even though the cafe was busy. Wholesale invoices lagged, and a $9,000 bag of green beans sat on the shelf.

If June had brought $6,000 more of collections, the three-month drop would have been $30,000. The pace would then have been $10,000 a month.

The roaster does not post a line that says this pace. The books already hold the month-end cash; you subtract and divide.

If the founder had put in $15,000 in May, ending cash could have been $71,000. The simple three-month gap would then hide most of the $12,000 monthly pace the shop still ran.

Common mix-ups

This pace is not the same as the cash consumed in one period. That drop is from opening to closing; this page is that drop turned into a monthly average.

This pace is not the same as how many months the rest will last. Months left uses this pace, but it is a different reading.

This pace is not the same as the month's loss. A loss is an Income Statement leftover; cash can leave for reasons that never hit that leftover.

Related terms

• Cash Burn: The net cash consumed by the business over a period.
• Cash Runway: How many months current cash will last at the present burn rate.
• Cash Position: The amount of cash on hand at a given moment across all accounts.
• Operating Expenses: The ongoing costs of running the business that are not direct costs of sale.
• Cash Flow Forecast: A forward projection of cash receipts and payments.
• Free Cash Flow: Operating cash flow left after the capital spending needed to keep running.
• Run Rate: Annualizing a recent period's results as a rough forward estimate.
• Headcount Plan: The staffing plan behind budgeted payroll cost by period.