Cash flow and burn rate

BY MATTHEW D. MOHR

With the year nearing completion, a business should have a very good feeling for its success (or failure) in generating additional cash flow for the year. Profits are important as a measure of success, but real cash flow is the measure of sustainability over time. A business may not generate cash every year, but over time cash must be generated to pay creditors and provide a return to investors.

New enterprises, especially in technology, require cash to operate. Without cash, wages can’t be paid and necessary expenses such as rent, power, communications and supplies can’t be acquired. The amount of cash a startup (or even a mature business in transition) needs to pay during a given period of time for its ongoing bills is called the enterprise’s “burn rate.” In other words, how much cash are you burning through during a certain period of time just to stay alive?

One regional technology based startup I am familiar with received sufficient funding from investors to get started, but fell short of necessary cash flow to keep paying staff once the business got rolling. The principles accepted no wages until the business grew to the point of being able to pay them and all its bills. Without the initial investment the business would have failed, but by determining its real burn rate and having patient investors, the business made it to the point of positive cash flow, which is not easy to do in a pure technology enterprise. The next step for that business will be to grow to the point where cash flow supports expansion and extraordinary returns to its investors.

Cash flow is the true measure of success for a business over time. PB

Matthew D. Mohr CEO, Dacotah Paper Co. mmohr@dacotahpaper.com