Startups – What’s your burn rate?

May 4, 2022


It might be time to update the old adage. Maybe it’s not cash that’s king, but cash flow. One study conducted by U.S. Bank concluded that 82% of business failures can be chalked up to bad cash management

When your startup’s in its early days, it probably isn’t turning a profit. But that doesn’t mean you can ignore cash flow. Even if you don’t expect to see much black on your P&L in the early years, you still need to monitor your cash inflow and outflow. Without staying on top of it, you can’t pay your staff or your vendors on time, maintain the lease for your office space, or pay taxes — you get the idea. 

To give you some extra motivation to make sure you’re placing proper emphasis on cash flow at your startup, let’s take a closer look. 

Cash flow and startups

As a quick refresher, cash flow is not the same as profit. Your profit is what you have leftover when you subtract your expenses from your revenue. Your cash flow is something different entirely.

You might count something as revenue before it becomes part of your cash flow, especially if you’re B2B. You likely record revenue when the invoice is issued — but that doesn’t mean you have that cash in hand. As a result, you can’t count it as part of your cash flow yet. Depending on the payment terms you established with that client (and their general timeliness in submitting payment), you might not see that cash for weeks or months. That payment doesn’t factor into your cash flow until you actually get the money from the customer.  

Because most startups operate on a shoestring budget, monitoring cash flow offers an important layer of protection. It can save you from a situation in which you owe money you can’t pay because a customer regularly doesn’t fulfill invoices on time. 

A note on negative cash flow

It’s not uncommon for startups to experience negative cash flow at one or more points during their early stages. 

That might happen as a result of investing in your business, like during a growth stage when you’re hiring more employees or leasing more space. In fact, fast growth is one of the leading reasons startups face negative cash flow. It’s an exciting time, but it’s important to keep a finger on the pulse of your cash inflows and outflows. That’s your only way to ensure that even when you’re in a negative period, you’re still going to be able to pay vendors, taxes, and your team. 

All told, you don’t need to panic over negative cash flow. But you do need to make sure that your projections show that it’s a passing phase. Otherwise, the growth you’re pursuing will be short-lived. 

How to track cash flow

Monitoring cash flow really comes down to making sure you’re not counting something as money in the bank until the actual money is in the actual bank. 

To help you get a handle on your startup’s cash inflows, look to the following areas:

  • Sales (remember, note the date that invoices are actually paid, not the day they’re sent, if that’s applicable to your startup)
  • Loans
  • Grants
  • Investments

For your outflows, look to categories like:

  • Staff salary and hourly wages
  • Employee benefits
  • Vendor/supplier/software provider payments
  • Loan payments, including interest
  • Lease payments
  • Taxes
  • Shareholder dividends (when applicable)
  • The purchase of fixed assets (e.g., computer equipment)

Before you start to worry about the extra work of even more bookkeeping to track cash flow, consider a solution to do the legwork for you. We recommend finance tools that can automate cash flow tracking for you.  

With one of these solutions in place, you’ll know what money you have available at any given moment, plus any upcoming dues for which your company will be responsible. You’ll also be able to see where you’re spending your money, helping you pinpoint any budget overages, and identify clients who are overdue on their payments. 

With all of this in hand, you’re able to make smarter decisions about scaling your startup. For example, you won’t decide to lease a bigger office right before several large invoices, and your quarterly estimated taxes come due. Or you’ll cut ties with a customer who’s continually delinquent on payment. 

Better intel on your cash flow can also help you shore up investor relations. Investors are interested in making sure that your company has the liquidity it needs to meet working capital requirements. This means you’ll need to communicate with your investors your current cash burn rate and runway (time till you are out of cash). This way, they will be in the best position to start making intros to other investors or assisting with exploring M&A opportunities.

Three areas to optimize for better cash flow

If cash flow isn’t looking great at your startup, the issue usually lies with one of three areas:

Accounts receivable

Look at how long it takes you to get paid, i.e., collection days. Offering something like net 30 terms might help you attract new customers, but don’t overextend your company here. Too many collection days will pose a direct threat to your cash flow. 

Even more importantly, be proactive about late payments. Establish a company collections policy and procedures for collecting if an invoice goes past due. 

Accounts payable

On the flip side, the longer you can wait to pay vendors, loan issuers, or anyone else you owe, the better (assuming you’re mindful of interest). Work to negotiate as many payment days as possible wherever you can to boost your cash flow. 


50 years ago, this was a little easier. Companies were warned against producing more of their physical product than they could reasonably expect to sell in the near future. Not only does inventory cost money to produce — money you need to come back in the form of sales — but it also costs money to store. 

Maybe your tech company is producing a physical asset and this applies to you. But even if you’re bringing something intangible to market, like an app or SaaS solution, applying an inventory mindset can help. You want to scale your support team and your server capacity in line with your sales, for example. You might not need the warehouse space for physical inventory, but you still don’t want to be “storing” anything that’s not going to translate directly into company profits in the near future. 

Forecasting your cash flow

Forecasting your cash flow gives you one of the most illuminating ways to see where your startup is headed. Gather data on A/R, A/P, and inventory, then project it out at least a year. Look at your other cash inflows and outflows, too. This forecast can help you plan for potential issues before they become pressing problems. Plus, it can clue you into opportunities to scale at optimal times. 

We can help here. As accountants who focus solely on supporting tech startups, we understand the nuance required to project your cash flow as accurately as possible. To see how we can help you plan for the future while supporting your company’s success today, get in touch