“Cash is king” - everyone has heard this phrase at some point. However, it is not only said that way, but actually has an important meaning in a business context, because without liquid assets Threatens companies quickly insolvency. For startups in particular, “Cash is King” is a important guiding principle. Startups usually have little or no income and therefore have to manage available financial resources wellto cover essential costs.
As a founder of a start-up, it is therefore important to know when money is becoming scarce so that you can react in good time to either raise new capital or reduce costs. To determine this point in time, the Cash burn rate (CBR) on important indicator.
In this blog article, you will learn what the Cash Burn Rate is, how it is calculated, how it can be optimized and Why the term is often used ambiguously.
What is the cash burn rate?
The cash burn rate is an important financial indicator for companies. It is a Business key figure, which indicates how quickly your startup will replace the existing capital to cover running costs spent.
Specifically, the aim is to determine how high the modulus Is, with the Money per billing period (days, weeks, months, years) in your startup is consumed.
If the CBR has been calculated, it will help you Timing to determine When financial resources run out and therefore insolvency is imminent.
This period of time, hereafter survival time called, is often associated with the CBR equated. This is problematic because it results in two different interpretations a high or low CBR.
If the CBR is meant as an amount, then a high CBR than difficult to interpret. On the other hand, is the Survival meant by the startup, then a high CBR is a positive signal.
However, the fact that a high CBR is a positive signal contradicts intuitive understanding of a rate and can cause confusion. That is particularly unfavorableWhen you with potential investors speaks. That is why we advise you to use the CBR cannot be equated with survival timeto avoid misunderstandings.
Importance of high and low CBR's
A company with a high CBR consumes its financial resources faster than it generates revenue. This is particularly common among startups because they high investments in technology, personnel, and other resources to Develop business.
One low CBR means that the company's liquid assets are relatively Consumed slowly, which is cheap because it more time has to implement its business plans and become profitable. It also means that you're able to smaller investments with your existing financial resources to do.
With larger investments It is important to check how you free up committed capital can to generate more liquidity. Alternatively, you can use a credit record or join private investors people who would like to participate in your startup.
Gross or net
The cash burn rate can be viewed in two variants: The CBR gross (Great burn rate) and the Netto CBR (Net burn rate).
Die CBR gross Indicates how quickly your startup spends money by increasing the amount of Operating expenses and investments viewed over a specific period of time.
Die Netto CBR On the other hand, both the spending as well as the takingsto determine how fast losses are increasing.
Startup indicator
As a founder of a startup, you should always keep an eye on the consumption of your financial resources. So you can in good time Take action, around the to reduce costs or additional sources of funding Find to your to secure liquidity.
In summary, the cash burn rate is a essential indicator for startups to monitor the consumption of financial resources. Effective control of CBR can help you to long-term survival and the success to secure your company.
Who is the Cash Burn Rate important for?
In addition to the already mentioned relevance for founders of startups, CBR is particularly important for investors and Venture Capitalistswho want to invest in your startup or are planning to do so You want to ensure that investments are used efficiently and that the company has sufficient financial resources to achieve its business goals. Determining the CBR is often part of Due diligence. By keeping an eye on CBR, investors can get an idea of financial condition make your startup.
Since startups often rely on external funding from Venture Capital are reliant, is it an advantage to have a low cash burn rate to show. In this way, you show that you can handle capital responsibly and thus gain the trust of potential financiers.
Overall, the cash burn rate plays for Startups, Investors and Venture Capitalists eine significant role. For this reason, it is important to regularly identify this financial instrument and, where appropriate, measures to customization The CBR to seize. However, CBR should not be confused with loss, which is calculated in the profit and loss statement and represents a different key figure.
What factors go into calculating the cash burn rate?
Cash and cash equivalents
Liquid and cash equivalents are the assets that your startup has available at short notice stands. They differ from capital tied up in tangible assets, as this capital must first be converted into liquid financing options before it can be used directly. The immediately available money consists of Cash assets and the Credits on the business account. For example, you can use these funds directly to make investments.
Negative operating cash flow
Operating cash flow is a Business key figure, which is used to analyse the available liquidity. In order to determine the cash flow, all Income and expenditure a specific billing period juxtaposed. This billing period may, for example, be based on a month or a year obtain. If you've spent more money than you earned in a period of time, the result is a negative cash flow.
Formula for calculating your startup's cash burn rate
To calculate your startup's CBR, you need the following formula:
CBR = negative operating cash flow/ cash and cash equivalents
You might be wondering where you get these numbers from — don't worry, we'll explain it to you step by step:
- Cash and cash equivalents: These include cash, Bank balances and others Funds available in the short term. A glimpse of yours balance sheet Or the demand from your Tax advisor can help you determine this value.
- Negative operating cash flow: This is the negative amount of operating income and spending within a specific period. This value can typically be derived from the income statement (profit and loss statement).
Calculation example for CBR
Assume that you have €50,000 into liquid assets And one monthly negative operating cash flow of €5,000.
The calculation of CBR using the formula is as follows:
CBR = 5,000/50,000 = 0.1
Je Lower the result the calculation is the better Is the financial situation of your startup to be assessed.
Calculation example for survival time
From this calculation, it is also possible to determine how long the Survival of your startup is 1 is divided by the CBR. It is important to note which billing period was used to calculate the CBR (days, weeks, months, years). This is the only way to achieve the result correctly interpreted become.
Survival time = 1/CBR
In this case, this results in:
Survival time = 1/0.1 = 10 months
This means that, given the current spending and revenue situation, 10 months It would take until your liquid financial resources are completely exhausted.
How can a startup reduce its cash burn rate?
Identification of essential expenditure
First, you should identify the essential expenses. Distinguish between fixed and variable costs. Fixed costs Are, for example, rent, salaries and Software licenses. Variable costs are dependent on the production volume, such as material costs or shipping costs. Analyze these expenses and make sure they're essential to the business model.
Reducing irrelevant costs
To increase survival time, you should irrelevant costs Lower. This includes expenses that do not directly contribute to the company's success. Examples of this include excessive office space or unnecessary trips.
renegotiation of contracts
Another starting point is renegotiation of contracts. Contact your suppliers and negotiate better conditions. Even with rental agreements or software licenses A negotiation can bring savings.
Performance-based salaries
The introduction of Performance-based salaries can help to extend survival. Bet for your employees targets and offer them, based on their achievement, Salary increases or bonuses on. This may result in them more efficient and motivated work and help you get a better handle on your spending.
Pivot of the business model
In some cases, it may be necessary to business model to rethink and adapt. A Pivot Can, for example, focus on a other customer segment or another Type of product or service lay. This change creates new opportunities for Increasing efficiency and Reduce costs.
conclusion
The cash burn rate is a key figure for startups that want to assess their financial health and liquidity. It provides information on how quickly available financial resources are used up, to cover running costs, and is therefore an indicator of survivability of a company.
One low CBR indicates that a startup is able to use its financial resources to be used in the long term, while a high CBR on possible financial bottlenecks points out. Regular monitoring and, if necessary, adjustment of this key figure is crucial in order to financial stability and the long-term success to ensure.
Frequently asked questions
How do you calculate the cash burn rate?
The CBR is calculated by using the negative operating cash flow through the liquid and cash equivalents shares. This calculation results in a number that indicates how The share of expenditure is high to the is available financial resources. From this figure, you can also get the Survival Derive the startup.
What is the significance of the cash burn rate for startups?
The CBR is important for startups because it provides information about financial health of the company. One high CBR means that the company has its available capital Quickly used upto cover running costs while a low CBR indicates that the company Economizes more efficiently and can work with its existing resources for longer.
Why should the cash burn rate be reduced?
Lowering CBR benefits you as a founder Mainly an advantage - more time. Because your startup can survive longer with the available funds, you have more time to optimizations to carry out, or important decisions to meet. This results in a greater opportunity that to increase profitability, which allows your startup to finance itself on its own.
Why is the cash burn rate important for investors?
Investors pay attention to CBR because it is Financial health indicator and serves the stability of a company. A high CBR can be warning signal serve that a company may have difficulty covering its costs or achieving its business goals. Investors are usually looking for companies with a low CBR, as this is due to a more efficiently managed company and suggests a lower risk.
What role does the cash burn rate play in financial planning?
CBR plays an important role by helping you understand how long your company can work with the available funds and how quickly you can new sources of income develop or Reduce costs must to increase profitability. So you can timely measures take action to overcome these difficulties and ensure the continued existence of your business.
