Cash Burn

What it measures

The absolute drop in cash and equivalents between two period-end snapshots of the balance sheet. It captures the net of every cash movement during the period — operating expenses paid, capital expenditures, debt service, and taxes out against revenue collected, investment proceeds, and loans in. It is a pure cash measure: non-cash charges such as depreciation, amortization, and stock-based compensation never touch it. A positive number means cash declined (you burned cash); a negative number means cash grew (you generated it).

Why it matters

Cash burn is the heartbeat monitor of a pre-profit company. It tells you how fast the bank account is draining, which — paired with how much cash you hold — is exactly how long you have to live. Investors look at it before almost anything else: it signals whether your spending is sustainable against your growth, and whether you will be back to raise before you have a choice. It is also an honesty check on the income statement. Profit can be massaged by accruals and non-cash entries; cash that left the account cannot. When burn climbs faster than revenue, your runway shrinks and the clock to your next raise speeds up.

How to read it

Read cash burn as a monthly average over a rolling window — trailing 3 months for a current pulse, trailing 12 months to smooth seasonality — never as a single raw month. One heavy month can simply be an annual insurance premium or an equipment purchase, not a structural change. A positive figure means you spent more cash than you brought in; a negative figure means the business is now self-funding, a sign of real maturity. Always pair the absolute burn with the cash you hold to read the only number that matters operationally — months of runway. A company holding \$1M and burning \$100K per month has roughly 10 months; the same company burning \$200K has 5. And always reconcile burn against revenue and expense trends before trusting a flat runway: if revenue is ramping, future burn falls and your real runway is longer than a simple cash-divided-by-burn estimate suggests.

What good looks like

Watch-outs

• Confusing cash burn with net loss. A company losing \$50K a month on the income statement might burn only \$20K in cash if it carries large non-cash charges — or burn \$100K if customer collections lag invoicing. Always reconcile the accounting result back to the money that actually moved.
• Letting one-time cash events distort the trend. A \$200K equipment purchase or a quarterly tax payment is real burn, but it skews the trailing average and misrepresents recurring spend. Investigate every spike and separate run-rate burn from one-off outflows.
• Ignoring financing inflows. If you raised \$2M mid-period, your closing cash is artificially high and headline burn looks tiny. Strip out raises, debt, and asset sales to recover true operating burn — otherwise runway and burn multiple become meaningless.
• Assuming a flat, linear runway. If revenue is growing, next period's burn is lower and your runway is longer than cash ÷ current burn implies. Read burn alongside revenue and expense trends, and stress-test the downside (churn rises, costs climb) before trusting a single number.

Worked example