How to Calculate Cash Burn Rate
How to Calculate Cash Burn Rate
As a small business owner, it’s essential to understand your cash burn rate. At its core, it is the rate at which your company uses up its cash reserves. It’s a good way to measure your net negative cash flow.
Here’s the calculation to calculate your cash burn rate:
Monthly Burn Rate=Beginning Cash Balance-Ending Cash Balance/Number of Months
Let’s say your company wants to calculate the rate for the first quarter of the year. Your cash balance on January 1st is $150,000. On March 31st (the last day of the quarter), it’s $90,000.
You’ll subtract $90,000 from $150,000 to get $60,000. Since you’re evaluating three months (January, February, and March), you’ll divide $60,000 by 3 and end up with a cash burn rate of
$20,000.
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Ways to Improve Your Cash Burn Rate
A positive rate shows you that you’re spending more than you’re earning, and need to make some changes. If you’re (unpleasantly) surprised with your cash burn rate, rest assured there are ways you can improve it. To do so, you'll need to increase the cash that comes in, decrease the cash that goes out, or... both! Here are some suggestions to help you out.
Increase Revenue
Think about how you can earn more money. Maybe you can boost your website traffic. Or perhaps you can add new products or raise your prices? More sales is sure to lead to more cash in the bank…. Assuming you can collect the cash on that revenue. More on that below...
Cut Payroll Expenses
If you have a labor intensive business with sky-high payroll costs, think about how you can reduce them. You may want to lay off non-essential employees, cut hours, or limit benefits. Whatever you decide to do, just make sure your productivity and efficiency doesn’t suffer.
Get Rid of Unprofitable Products or Services
Perform a deep dive into your revenue streams. If you find one or a few that are simply unprofitable, there’s no need to keep them. Scrap them and focus on more profitable streams or put them on hold until you figure out how to make them work.
Collect Timely Payments
Make sure you collect payments from your customers as soon as possible. If you notice that many of them delay payment, offer early payment discounts or charge late fees. Waiting on payments is bound to take a toll on your cash burn rate. Managing your DSO is essential to all businesses… remember, Cash is King!
Ready to Achieve a Healthy Cash Burn Rate? Contact GrowthLab Today
At GrowthLab, we help small businesses like yours succeed. You can trust us to calculate your rate, design a strategy to improve it, and then help you actually implement that strategy! Contact us at 888.673.8481 for more information!
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