Cash FlowvsBurn Rate

Cash flow is the actual money moving in and out of your business — not revenue, not profit, but real dollars in your bank account. Revenue is an accounting concept (you 'earned' $100K); cash flow is a reality concept (you 'received' $80K and 'spent' $95K, so you're $15K poorer). Companies die from running out of cash, not from unprofitability. 82% of small businesses fail due to cash flow problems, not lack of demand. The three types: Operating Cash Flow (from business activity), Investing Cash Flow (buying/selling assets), and Financing Cash Flow (debt, equity).

Burn rate is the speed at which your company spends cash reserves before generating positive cash flow. Gross burn is total monthly spending; net burn is spending minus revenue. A startup with $50K/month expenses and $20K/month revenue has a $30K net burn rate and needs $30K from savings every month to survive. VCs use burn rate to calculate runway and assess financial discipline — a startup burning $200K/month with $10K MRR will be scrutinized much harder than one burning $200K with $150K MRR.

The trap is confusing revenue with cash. A SaaS company booking $500K in annual contracts sounds healthy — but if those contracts are paid monthly ($42K/month), and you spent $200K this month on salaries and $100K on marketing, you're cash-flow negative by $258K THIS MONTH despite being 'profitable' on an annual basis. Enterprise SaaS is worse: Net-60 or Net-90 payment terms mean you deliver value for 3 months before receiving a single dollar. Many profitable companies have died because they couldn't cover payroll while 'waiting for invoices to be paid.'

The trap is tracking burn rate from your P&L instead of your bank account. Accrual accounting can show $50K net burn while your bank is actually losing $80K/month because of delayed client payments (accounts receivable), prepaid annual subscriptions expiring, and vendor invoices coming due simultaneously. Many founders have been shocked to discover their 'calculated' 12-month runway was actually 6 months when measured by actual cash in the bank.

Calculate your monthly Operating Cash Flow: Cash Received (not revenue booked) − Cash Spent (not expenses accrued). Track the gap between revenue recognition and cash collection (DSO — Days Sales Outstanding). Target: DSO under 45 days for SaaS, under 30 for e-commerce. Build a 13-week rolling cash flow forecast: project every cash in-flow and out-flow weekly. Never rely on revenue projections — only count cash when it hits your account.

Calculate both metrics and track them separately: Gross Burn = Total Cash Out per Month. Net Burn = Cash Out − Cash In. Then compute Runway = Cash Balance ÷ Net Burn. Set alerts: if runway drops below 6 months, initiate cost cuts or fundraising immediately. Review burn rate weekly (not monthly) — cash surprises kill more startups than bad products.