Cash Burn

Cash burn is the rate at which a start-up spends its cash flows for business purposes. The workbook adds the reason it is watched: it is essential to control the burn rate for maintaining financial stability and a good runway for future expenses.

It is a rate, not a balance — rupees per month, not rupees. And it is the number that turns every other metric into a deadline, because a company with twelve months of cash has twelve months to fix whatever its other metrics are saying.

Burn appears twice in the syllabus, in two different roles.

As a screening input. Private equity deal sourcing uses growth monitoring through software subscriptions that supply updated data on growth-stage companies — business model, founding team, current investors, revenue model, Annual Run Rate, cash burn, product segments, market segments and other key indicators. Burn is one of the handful of fields a fund uses to decide whether a company is even worth a meeting.

As a financial metric. In the valuation chapter, burn rate heads the financial metrics list, followed by operating cash flow, where positive operating cash flow is described as vital for long-term sustainability and growth. The two together describe the same thing from opposite ends: burn is what the business consumes, operating cash flow is what it produces.

Runway is the division of one into the other: cash in hand divided by monthly burn, expressed in months. It sets the fundraising calendar, and it explains where the rest of the private capital toolkit comes in. A company that will run out before its next priced round takes a bridge round — short-term financing to fund working capital requirements between two rounds of funding, provided by banks, debt funds or even venture capital funds. Or it takes venture debt, which has a contractual maturity of two to three years, often sits senior to equity, and avoids the dilution of raising equity before the valuation has stepped up.

Monthly cash burn = Cash spent - Cash generated, per month

Runway (months)   = Cash in hand / Monthly cash burn

Ashwin Mobility closes a Rs 30 crore Series A in April.

Cash in hand                                  Rs 30.00 crore
Monthly operating spend                       Rs  2.40 crore
Monthly revenue collected                     Rs  0.65 crore
Monthly cash burn   2.40 - 0.65            =  Rs  1.75 crore

Runway   30.00 / 1.75                      =  17 months

Seventeen months, and a Series B that realistically needs six months of process. So the company has roughly eleven months to reach the metrics that price the next round.

In month 12 it has Rs 9 crore left and the round is three months from signing. Two ways out:

Most companies take the second, which is exactly why the workbook places the bridge round between two funding rounds and notes that banks, debt funds and venture capital funds all supply it.

Suppose instead that burn had been Rs 3.5 crore a month. Runway would have been 8.5 months on the same Rs 30 crore — and a round that takes six months to close would have had to begin almost immediately, from a position of weakness. That is the whole reason an investor asks for the burn figure before it asks for the growth figure.

Chapter 11 section 11.1.3.1 lists cash burn among the growth-monitoring indicators used in private equity deal sourcing and defines it in footnote 106; Chapter 14 section 14.8.1 carries it at the head of the financial metrics. Expect a definition-matching question and a runway computation from cash and monthly burn.

• Burn is a rate per period, not a balance. Rs 1.75 crore a month, never 'a burn of Rs 30 crore'.
• Gross burn is spending; net burn nets off revenue collected. A runway computed on the wrong one is wildly out.
• High burn is not automatically bad. It is bad relative to runway and to the timetable of the next round.
• Do not confuse it with maximum drawdown, which is a fund-level peak-to-trough measure of AUM, not a company's spending rate.
• Operating cash flow is a separate metric in the same list — what the business generates, not what it consumes.
• Cutting burn by cutting marketing raises CAC payback and can raise churn, so the cheapest-looking fix often damages the metrics the next round is priced on.