If your business is losing money, you have a situation that can’t be sustained indefinitely. The clock is ticking and, unless changes are made, your business will fail.
The Cash Burn
In the days of the dot.com bubble in the late 1990s, a new measure became the rage called the cash burn, measured in months.
This was the number of months the business could continue to trade as it currently was, before it ran out of cash.
This was simply the amount of funding available divided by the monthly cash outflow.
If there was £80,000 in the bank and the business was using £20,000 of it a month, the cash burn was 4 months. If nothing changed, then the following month, it would be three months as the cash would have dropped by £20,000.
This meant that an end date could be calculated. If your cash burn at the end of April was 4 months, then everything was over by the end of August unless:
a) the net cash used changed for the better;
b) more money was invested into the business to give it an extended life.
It’s simple arithmetic that halving the burn rate, from £20,000 to £10,000 per month extended the life of the business. The £80,000 = 4 months became 8 months and that gave much more time for bright ideas to be thought about, implemented and improved before the crunch.
