Understanding how much cash you use (i.e. burn) each month to run your business is critical.  Knowing how long your current cash balance will last given what you owe your vendors and expect to receive from customers is also important.  With this information you can make better decisions about when and where to spend discretionary cash and evaluate when it’s necessary to cut essential expenses.

Ask your bookkeeper or accountant to provide a year to date cash-basis profit & loss statement. You can calculate the average burn rate one of two ways:

1. Take year to date net income and divide by the number of months or,
2. Take year to date total expenses and divide by the number of months.

I prefer calculation #2 as the average will be larger and it shows what you will need if you have no cash receipts in a particular month. Make sure to remove any out of the ordinary cash receipts and/or disbursements as they will result in a less than accurate burn amount. But do make sure you know the reason for the non-ordinary receipts or disbursements as many times these are what can trip you up.