I was recently in the vicinity of a relatively young start-up company for which I have served as an adviser. I was interested to see if anyone was still in the office at 7 p.m., so I drove by and noticed the outside door open to the office of the company president.

There he was, working hard at his computer. I stopped and walked in to say "hi" and see how things were progressing. He was excited to tell me about a potential contract and the next release of his software that was scheduled for June. The conversation eventually led to the point where many of our discussions conclude: "What is the company's cash position?"

I am always impressed with an entrepreneur who has a commanding and precise understanding of the firm's cash position. In the early days of growing a company, it is the careful management of cash that will help ensure survivability and the realization of the entrepreneur's dream. Learning to communicate intelligently about cash flow and to effectively manage cash is the responsibility of every company leader.

The term often used by investors, advisers and entrepreneurs to describe the use of cash by an enterprise is "cash burn." Cash burn is the measure of how fast the company is spending its cash. The calculation of cash burn, although straightforward, needs to include all of the key elements.

The method most commonly used to compute cash burn includes the following: Add expenses (salaries, administrative, marketing, R&D) plus inventory-related purchases plus interest expense plus capital investments plus taxes. Then you subtract your change in liabilities (accrued liabilities plus change in payables).

In summary, cash burn is the money that your company spends on its operations and on its investment in assets. As you look at the burn over a fixed period of time (usually a month), you begin to create a "cash burn rate."

The other key factor in this analysis is your "cash build," or the cash generated by sales less the change in receivables. The "cash build rate" is the cash that you build for a fixed period of time, again usually a month.

Once you know your cash burn and cash build, you are able to talk about the company's net burn or build. In the early stages of growth and market development, a company will typically burn more funds than it generates, requiring the firm to raise capital through the offering of stock or the securing of some type of debt.

Now you are ready to take a look at the company's "runway," or how long the company can survive within the current scope of operations and cash reserves. For example, if your cash burn rate is $25,000 per month and the cash build is $15,000 per month, then the net cash expenditure is $10,000 every 30 days. With a cash balance of $50,000, the firm would have a five-month "runway" before additional cash would be needed to support current operations.

Back to my Friday night visit. The situation at this company was more complex as the cash burn and cash build continued to increase monthly as the company grew. But bottom line, the news was good. The CEO had approximately a six-month runway in the worst-case scenario, and in his expected scenario anticipated a large contract to begin generating significant cash build in July. It was refreshing to talk with an entrepreneur who knew his cash numbers, how to communicate them in a professional manner and could give me the good news that he still had several months of runway.