Cash burn is a key indicator for companies—particularly start-ups and fast-growing structures. It refers to the rate at which a company uses its cash to finance operating costs and investments before achieving profitability.

At every stage in a company's life, rigorous monitoring of cash burn is crucial to ensuring its long-term survival. Not only does it make it possible to anticipate financing requirements, but it also helps to optimize financial resource management to ensure sustainable growth. 

This article takes an in-depth look at the concept of cash burn, how it is calculated, and effective strategies for reducing it and optimising financial management.

How is cash burn calculated?

Cash burn is calculated in two main ways:

1. Gross burn rate

The gross burn rate represents the total monthly expenses, without taking into account the income generated by the business.

• Gross burn rate = Total monthly expenditure‍

Example: If a company spends €100,000 a month on wages, rent and other charges, its gross burn rate is €100,000.

2. Net Burn Rate

This reflects the cash actually consumed each month, taking into account the income generated.

• Net burn rate = (Cash at start of period - Cash at end of period) / Number of months

Example: You start a month with €500,000 in cash and end it with €400,000. Your net burn rate is therefore (500,000 - 400,000) / 1 = €100,000 that month.

The net burn rate can also be used to assess your runway—how many months the company can last with its current cash position.

Why is cash burn important?

Cash burn is a key financial indicator that directly influences strategic decisions and your company's ability to raise funds.

Attracting and reassuring investors

Investors carefully analyze cash burn to assess your company's financial health and cash management. Controlled cash burn boosts their confidence, while a cash burn rate that is too high without any prospect of profitability can put the brakes on financing.

Optimizing growth strategy

Keeping a close eye on cash burn helps to align investment with growth and avoid overspending that could compromise your company's viability.

Better financial planning

Accurate cash burn monitoring helps you anticipate financing requirements and optimize the runway to avoid any cash shortfalls.

Avoid management errors

Excessive cash burn can be the result of poor financial decisions: hasty investments, excessive recruitment, poor resource allocation. Identifying these errors early on allows you to adjust your strategy.

12 Strategies to reduce cash burn

Here are the most common and effective ways to slow your cash burn rate. 

1. Reduce non-essential costs

Analyze your expenses and eliminate those that don't contribute directly to growth. These could include unused subscriptions, overpriced rent, ineffective advertising campaigns, and potentially even staffing.

2. Automate and digitize

Investing in automation tools (CRM, ERP, invoice management) lets you optimize internal processes and reduce operational costs.

3. Negotiate with suppliers

Renegotiate contracts to obtain better payment terms and optimize your supply costs.

4. Improve management of trade receivables

Implement effective dunning policies to speed up the collection of payments and reduce delays.

5. Prioritize profitable investments

Focus your resources on activities that generate a rapid return on investment and put secondary projects on hold.

6. Diversify revenue sources

Broaden your offering with subscriptions, complementary services or the exploration of new markets to reduce dependency on a single revenue channel.

7. Optimize stock management

Optimized inventory management avoids the costs associated with overstocking (excess storage fees) and unsold stock (waste), thereby improving cash flow.

8. Reassess your business model

If your business is struggling to achieve profitability, consider making strategic adjustments: new prices, adjusting your offerings, repositioning yourself in the market, or finding additional revenue streams.

9. Monitor cash flow in real time

Using specialized software, you can monitor expenditure accurately and quickly anticipate any adjustments you need to make.

10. Reduce dependence on external financing

Rather than continually raising funds, work on improving profitability to finance growth through the revenues generated.

11. Implement strict budgetary control

Drawing up an accurate budget and monitoring variances between forecasts and actual expenditure will enable you to identify financial management problems quickly.

12. Access flexible financing

Financing solutions such as those offered by Defacto enable companies to secure funds quickly to avoid using up too much of their own cash.

Adapting cash burn management to the different phases of the business

Your desired cash burn rate changes depending on what stage your company is currently in.

• At launch: At start-up, companies invest heavily in product development, recruitment and marketing. A high cash burn rate is normal, but still must be kept under control through rigorous budget planning.
  
  
• In the growth phase: A growing company needs to balance its cash burn by ensuring that expenditure increases in proportion to the revenue generated.
  
  
• In times of crisis: During a period of economic uncertainty, it’s crucial to preserve cash flow, diversify income and limit unnecessary expenditure to ensure financial stability.

In a nutshell

Cash burn is a fundamental financial indicator that has a direct impact on your company's viability. Proactive management and well-defined strategies can optimize cash burn and ensure sustainable growth.

By applying best practices and adopting flexible financing solutions—such as those offered by Defacto—companies can better manage their cash burn and secure their financial future.

Want to optimize your cash burn and strengthen your cash position? Contact Defacto to find out about our solutions tailored to your needs.