Startup Burn Rate & Runway Calculator
How Is Burn Rate Typically Calculated?
For startups and high-growth companies, cash is oxygen. "Burn rate" is the standard metric used to track how fast a company is using its cash reserves to finance operations before generating positive cash flow. Understanding how burn rate is typically calculated is essential for founders to avoid running out of money and for investors to assess the sustainability of a business model.
While the concept is straightforward—money going out versus money coming in—there are two distinct ways to calculate it: Gross Burn and Net Burn.
1. Gross Burn Rate Calculation
Gross burn rate measures the total amount of operating costs incurred by a company each month. It answers the question: "How much does it cost to keep the lights on?" irrespective of any income.
Includes:
- Salaries and payroll taxes
- Office rent and utilities
- Server costs and software subscriptions
- Marketing and advertising spend
- Legal and administrative fees
Example: If a startup spends $40,000 on salaries, $5,000 on rent, and $5,000 on servers/marketing monthly, their Gross Burn Rate is $50,000.
2. Net Burn Rate Calculation
Net burn rate is the rate at which a company loses money. This is the more critical metric for determining how long the company can survive on its current cash reserves. It accounts for any revenue coming in that offsets expenses.
Example: Using the previous scenario, if that same startup generates $15,000 in monthly revenue:
- Expenses: $50,000
- Revenue: $15,000
- Calculation: $50,000 – $15,000 = $35,000
The Net Burn Rate is $35,000. This means the company's cash balance decreases by $35,000 every month.
3. Calculating Cash Runway
The primary purpose of calculating burn rate is to determine the "Runway"—the amount of time (usually in months) the company has before it runs out of cash.
If the startup in our example has $350,000 in the bank:
- $350,000 (Cash) / $35,000 (Net Burn) = 10 Months Runway
This means the company has 10 months to either become profitable or raise more capital.
Why This Calculation Matters
Investors scrutinize these numbers heavily. A high burn rate is acceptable if growth is astronomical, but a high burn rate with low growth is a warning sign. Typically, seed-stage startups aim for 12–18 months of runway to ensure they have enough time to reach the milestones required for the next funding round.
Edge Cases to Consider
- Negative Net Burn: If revenue exceeds expenses, the Net Burn is negative. This means the company is Cash Flow Positive and theoretically has an infinite runway.
- One-off Expenses: When calculating typical burn rate, it is often wise to exclude extraordinary, non-recurring costs (like a one-time legal settlement) to get a more accurate picture of ongoing operational burn.