Ever wonder how quickly your business spends money?
This question has left many business owners and startup founders awake at night. Cash burn rate, the rate at how a business “burns” its money, is a crucial factor when analyzing and managing cash flow.
So, how is cash burn rate computed? To compute for your cash burn rate, follow these steps:
- Pick a specific time frame in your business, like a month, quarter, or year. Let’s say we are computing for the cash burn rate for quarter 1 ending June 30.
- Get the ending balance of your cash and subtract it from your beginning balance. In our example, cash balance as of June 30 is Php 500,000. Cash balance as of April 1 is Php 600,000. Subtracting the ending balance from the beginning balance, we get Php 100,000.
- Divide the difference by the number of months in your chosen time frame. In our example, we divide Php 100,000 by 3 months (there are 3 months in a quarter, right?) We then get the cash burn rate of Php 33,333.33 per month.
Knowing your business’ cash burn rate can help you anticipate and manage cash flow. In our example, we know that we spend at least Php 33,333.33 per month in Quarter 2. In planning for Quarter 3, we can make the assumption that we need at least Php 33,333.33 in cash revenues to come in to cover our base spending.