Cash Burn Calc
How do most people calculate cash burn? Is it just operating cash flow less investing cash flow? Or do some people only look at the total expenses of the business less capex (i.e., not consider changes in WC)?
https://www.mostlymetrics.com/p/burning-bad?utm_source=substack&utm_medium=email
Not sure if this really answers my question. It's confusing because this author is saying burn is just revenue less expenses. But do those expenses include accrued or prepaid expenses? If he's just saying cash burn is "what you bill your customers - what you spend" then when he says expenses, does he means just cash expenses?
You absolutely need to consider W/C because a company's cash conversion cycle drives seasonal liquidity requirements.
Can you elaborate on this a bit more?
Think about a retailer. A ton of sales are driven by the holiday shopping season in Q4, but you need to prepare ahead of time and build inventories Q2/Q3. So, you have a cash outflow to build inventories expecting to make it all back in Q4. If I'm the CFO of this business I need to ensure I have sufficient liquidity, whether it be via cash, lines of credit, or cash flow, to build my inventory given the seasonal aspect of the business.
We usually take the EBITDA and divide it by the month we value the business (i.e. latest financials provided) to arrive at the monthly burn. Then take cash balance/monthly burn to arrive at month's remaining/cash-out date.
EBITDA minus working capital changes minus capex minus debt payments.
Usually just take EBITDA
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