Understanding and Calculating Your Burn Rate
Burn rate is a crucial metric for startups and businesses to understand how quickly they are spending their available cash reserves. It's essentially the rate at which a company is losing money, typically measured on a monthly basis. Monitoring burn rate helps businesses manage their finances, make informed decisions about spending, and plan for future funding needs. There are two primary types of burn rate: gross burn rate and net burn rate.
Gross Burn Rate
Gross burn rate is the total amount of money a company spends each month. This includes all operating expenses like salaries, rent, marketing, software subscriptions, and any other costs associated with running the business. It provides a snapshot of the company's total monthly outflow.
Net Burn Rate
Net burn rate is more indicative of the actual cash depletion. It's calculated by subtracting the cash generated (revenue) from the total cash spent (gross burn rate) in a given period. A positive net burn rate means the company is spending more than it's earning, while a negative net burn rate (or "negative burn") signifies profitability, where revenue exceeds expenses.
Why is Burn Rate Important?
- Cash Runway: Burn rate is directly used to calculate the cash runway – the amount of time a company has before it runs out of money. Runway = (Total Cash Available) / (Net Burn Rate).
- Financial Planning: Understanding burn rate allows for more accurate financial forecasting and budgeting.
- Investor Relations: Investors closely monitor burn rate to assess a company's financial health and operational efficiency.
- Decision Making: High burn rates might necessitate cost-cutting measures or a pivot in business strategy.
How to Calculate Burn Rate
The formulas are straightforward:
Gross Burn Rate = Total Monthly Operating Expenses
Net Burn Rate = Gross Burn Rate – Monthly Revenue
The calculator below will help you compute your net burn rate and estimate your cash runway.