Cash Burn Rate & Runway Calculator
Understanding Your Cash Burn Rate
For startups and small businesses, the cash burn rate is the speed at which your company is spending its venture capital or cash reserves before generating a positive cash flow. Calculating your burn rate is essential for financial planning, fundraising discussions, and operational survival.
Gross Burn Rate vs. Net Burn Rate
It is important to distinguish between the two types of burn rates:
- Gross Burn Rate: This is the total amount of operating expenses your company incurs each month. It represents your total spending without considering income.
- Net Burn Rate: This is the actual amount of money your company is losing each month. It is calculated by taking your total expenses and subtracting your total revenue.
How to Calculate Cash Runway
Your cash runway is the amount of time your business has before it runs out of money, assuming spending and revenue stay constant. The formula is:
Practical Example
Imagine a tech startup with $600,000 in the bank. They spend $50,000 per month on salaries, server costs, and marketing (Gross Burn). However, they bring in $10,000 in monthly subscriptions.
- Gross Burn: $50,000
- Net Burn: $50,000 – $10,000 = $40,000
- Runway: $600,000 / $40,000 = 15 Months
In this scenario, the company has 15 months to reach profitability or secure another round of funding before the cash balance hits zero.
Strategies to Extend Your Runway
If your runway is shorter than 6-12 months, you may need to take action:
- Reduce Fixed Costs: Evaluate office space, software subscriptions, and non-essential vendor contracts.
- Accelerate Revenue: Focus on high-converting sales channels or adjust pricing models to increase monthly cash inflow.
- Manage Accounts Receivable: Encourage faster payments from clients to keep cash moving into the business more quickly.
- Fundraising: Use your burn rate data to present a clear financial roadmap to potential investors.