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Cash Burn

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Key Highlights

  • Cash Burn, also known as Burn Rate, refers to the rate at which a company spends its cash reserves to cover operating expenses when it is not yet generating positive cash flow.

  • Types of cash burn includes gross and net burn.

What is Cash Burn?

Cash Burn, also known as Burn Rate, refers to the rate at which a company spends its cash reserves to cover operating expenses when it is not yet generating positive cash flow. It is a crucial metric for startups and early-stage companies that rely on external funding to run their business.

Types of Cash Burn

1. Gross Burn: The total amount of monthly operating expenses, including salaries, rent, marketing, etc.

Example: If a startup spends ₹10 lakh per month on all expenses, its gross burn rate is ₹10 lakh.

2. Net Burn: The actual reduction in cash after subtracting revenues from expenses.

Formula: Net Burn = Cash Outflows – Cash Inflows

Example: If monthly expenses are ₹10 lakh and revenue is ₹3 lakh, net burn = ₹7 lakh/month.

Why Cash Burn Matters?

  • Tracks Financial Health: Shows how quickly a company is depleting its cash.

  • Estimates Runway: Helps investors and founders calculate how long the company can survive without new funding.

  • Monitors Sustainability: Encourages smarter budgeting and cost control.

Cash Runway Formula

To find out how long a company can keep operating:

Cash Runway = Cash Reserves ÷ Net Burn Rate

Example:

If a startup has ₹70 lakh in the bank and a net burn of ₹7 lakh/month:
Runway = 70 ÷ 7 = 10 months

Use in Fundraising

Cash burn is a key metric investors evaluate before funding. A high burn rate with no clear path to revenue can raise red flags. On the other hand, a controlled burn with a good growth plan shows discipline and planning.

Indian Context

Startups in India, especially in sectors like edtech, fintech, and e-commerce, often have high burn rates in the initial years. News reports regularly highlight companies “burning cash” to gain market share through discounts, advertising, and expansion.