Cash burn is an estimate of how fast the cash in a business is being used to meet operating expenditure.
It is calculated as a 'number of months' using the following formula:
Cash & Deposits
((Operating expenses + interest + tax) – non-cash expenses) / 12 months
The cash burn figure can be compared with the current bank balance to give managers/owners a sense of urgency in regard to potential cashflow issues.
A cash burn monthly figure that is less than 1 could indicate the business may face significant cashflow pressure within 30 days, if sales are not quickly turned into cash.
Insights from Justin Martin, Colour Accounting Facilitator