What is cash burn?

Definition

Cash burn is the net cash the business consumed over a period. On the books, this is a downward movement in cash and cash equivalents, not a ledger account you debit and not the same number as the loss.

A coffee roaster still building accounts reads it from opening cash and closing cash. If the month started at $80,000 and ended at $68,000, the consume was $12,000.

It is a period total, not a snapshot. The Balance Sheet shows what is left; this reading shows how much was used up getting there.

Stay with net cash consumed when you read it. The monthly pace of that consume, and how many months the rest will last, are later questions.

Where it shows up

Balance sheet: Related to cash going down.

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

Cash flow: Related to a negative net change in cash over the period.

See also: Burn Rate · Cash Runway · Cash Flow From Operations

When you look at your Statement of Cash Flows, a period that consumed cash shows a negative total across the three sections. That drop is the consume this page names.

When the figure is large, the roaster used more cash than it brought in. When it is small or reversed, collections, a slower shelf, or new money coming in offset the outflow.

The Income Statement does not print this consume. Net income can be a small leftover, or even a loss, while cash moved by a different amount.

The Balance Sheet shows the opening and closing cash lines. This reading is the gap between them when that gap is a use of cash.

How it works

Take the spendable total at the start of the period. Subtract the spendable total at the end.

If the result is a positive gap, cash was consumed. $80,000 minus $68,000 is $12,000 of consume.

Read the period consume in this order:

• Take the spendable total at the start of the period.
• Subtract the spendable total at the end.
• A positive gap means cash was consumed.
• Pull owner or lender cash infusions out of the endpoints if they hid the drop.

Stay with net cash. A week of strong cafe sales inside a month that still ended lower does not erase the month's consume.

Operating expenses are a common reason cash leaves, but they are not the whole story. Beans bought for the shelf, a roaster payment, and an owner taking money out also consume cash.

A leftover on the Income Statement does not block this reading. The roaster can post a small profit and still burn cash if it stocked green beans or waited on wholesale invoices.

New money from an owner or a lender can hide the consume if you only look at the two endpoints. The simple start-versus-end gap is the honest first read only when that extra money is absent or is pulled out of the math.

Do not treat the ending balance as the consume. $68,000 is what is left; $12,000 is what was used.

This page stays on the period's net cash consumed. The average monthly pace of that consume, and how many months the rest will last, belong on other pages.

Example

Kiln & Cup, a founder-run coffee roaster, starts June at $80,000 across checking and a small savings account. It ends June at $68,000.

The consume for June is $12,000. That is the net cash the roaster used, not the month's leftover on the Income Statement.

June posted $2,000 of profit after depreciation expense. The extra drop came from a $9,000 bag of green beans still on the shelf and from wholesale invoices that had not cleared.

If a cafe week had brought $4,000 more of collections, closing cash would have been $72,000. The consume would then have been $8,000, not $12,000.

The roaster does not post a line that says this consume. The books already hold the opening and closing cash; you subtract.

If the founder had put in $10,000 mid-month, closing cash could have been $78,000. The simple gap would then hide most of the $12,000 the shop still used.

Common mix-ups

This consume is not the same as the month's loss. A loss is an Income Statement leftover; cash can fall for reasons that never hit that leftover, and a profit can still coincide with a drop.

This consume is not the same as the average monthly pace of the drop. That pace is burn rate, a later reading of this number.

This consume is not the same as how many months the rest will last. That clock uses this consume, but it is not this consume.

Related terms

• Burn Rate: The average monthly pace at which cash is being consumed.
• Cash Runway: How many months current cash will last at the present burn rate.
• Cash Flow From Operations: Cash generated or used by the day-to-day running of the business.
• Free Cash Flow: Operating cash flow left after the capital spending needed to keep running.
• Net Change In Cash: The total increase or decrease in cash across all three cash-flow sections.
• Cash Position: The amount of cash on hand at a given moment across all accounts.
• Forecast: An updated projection of where the numbers are actually heading.
• Operating Expenses: The ongoing costs of running the business that are not direct costs of sale.