Cash Burn Rate (CBR)

The cash burn rate (CBR) is a key figure that shows how quickly a company uses up its available cash to cover its current expenses. It is particularly important for start-ups and growth companies, which generally spend more than established companies.

Importance of Cash Burn Rate

• For companies: The CBR is an important indicator of how long a company can finance its current activities with existing capital without relying on new sources of financing. A high CBR can be a warning sign and force you to reduce your spending or seek additional financing.
• For investors: CBR is a key factor in assessing a company's financial health and risk. Investors use CBR to assess whether a company is able to maintain its operations over the long term and whether an investment makes sense.

Calculating the cash burn rate

CBR is usually calculated on a monthly or quarterly basis. The formula is:

CBR = (initial cash balance - final cash balance)/number of periods (months or quarters)


example:

Your company had 500,000€ in cash at the beginning of the year and 200,000€ at the end of the year. The CBR for the year is:

CBR = (500,000€ - 200,000€)/12 months = 25,000€ per month


Interpretation of the cash burn rate

• High: A high CBR indicates that your company is rapidly using up its cash and may be struggling to cover its expenses with revenue. This can lead to financial bottlenecks and force you to seek additional financing or even file for bankruptcy.
• Low: A low CBR means that your company is better at controlling its spending and may be profitable or has sufficient financial reserves.

Causes of a high cash burn rate

• Growth phase: Companies in the growth phase often invest heavily in marketing, sales, product development and personnel, which can result in high spending.
• High fixed costs: Companies with high fixed costs, such as rents, salaries, and interest, may have higher CBR even if sales are stable.
• Inefficient cost management: Lack of cost control and inefficient processes can lead to unnecessary spending and increase CBR.
• Competitive pressure: In competitive industries, companies may need to invest more in marketing and sales to gain or maintain market share.

Measures to reduce the cash burn rate

• Cost control: Reviewing and reducing unnecessary spending, negotiating better terms with suppliers and optimising processes to increase efficiency.
• Sales increase: Increasing revenue by developing new products or services, entering new markets, or improving sales and marketing strategies.
• Financial planning: Preparation of a detailed financial plan that forecasts your company's income and expenses and keeps an eye on CBR.
• Sources of funding: Looking for additional sources of financing, such as venture capital, loans, or government funding programs.

Industry-specific differences

CBR may vary by industry. Start-ups and technology companies often have a higher CBR than established companies in traditional industries. This is because they typically invest more in research and development, marketing, and sales to drive their growth.

Would you like to know more?

Contact us today to learn more about our Cash Burn Rate services We are looking forward to helping you improve your financial situation and grow your business!

‍