The Cash Burn Rate is a crucial financial metric, especially for startups and companies in growth phases. It measures how quickly a company is spending its available cash reserves to cover its expenses before it starts generating positive cash flow from operations. In essence, it tells you how long your company can continue operating with its current cash balance.
Why is Cash Burn Rate Important?
Financial Planning: It helps in forecasting future cash needs and planning for fundraising rounds.
Operational Efficiency: Monitoring burn rate can highlight areas of excessive spending.
Investor Relations: Investors closely watch burn rate to assess financial health and runway.
Survival Runway: It directly relates to the company's "runway" – the amount of time it can operate before running out of money.
How to Calculate Cash Burn Rate
The calculation is straightforward and involves understanding your company's cash inflows and outflows over a specific period. There are typically two ways to look at burn rate:
1. Gross Burn Rate:
This is the total amount of cash a company spends in a given period. It represents the absolute cost of operations.
Formula: Gross Burn Rate = Total Cash Outflows / Time Period
2. Net Burn Rate:
This is a more insightful metric as it accounts for the cash a company brings in during the same period. It shows the actual decrease in cash reserves.
Formula: Net Burn Rate = (Total Cash Outflows – Total Cash Inflows) / Time Period
Our calculator specifically computes the Net Burn Rate, as it provides a clearer picture of how fast your cash balance is decreasing.
Example Calculation:
Let's consider a hypothetical startup, "Innovatech Solutions":
In the last month, Innovatech Solutions had Total Cash Inflows of $20,000 (from sales and a small investment).
Their Total Cash Outflows (salaries, rent, marketing, software subscriptions) were $75,000.
The Time Period is 1 month.
Using the Net Burn Rate formula:
Net Burn Rate = ($75,000 – $20,000) / 1 month
Net Burn Rate = $55,000 / 1 month Net Burn Rate = $55,000 per month
This means Innovatech Solutions is spending $55,000 more than it earns each month, reducing its cash reserves by this amount. If they started the month with $300,000 in the bank, their "runway" would be approximately $300,000 / $55,000 ≈ 5.45 months.
Tips for Managing Cash Burn:
Regularly review and categorize all expenses.
Focus on revenue-generating activities to increase inflows.
Negotiate better terms with suppliers to reduce outflows.
Set clear budgets and track spending against them.
Always maintain a buffer for unexpected costs.
function calculateCashBurn() {
var cashInflows = parseFloat(document.getElementById("cashInflows").value);
var cashOutflows = parseFloat(document.getElementById("cashOutflows").value);
var timePeriodMonths = parseFloat(document.getElementById("timePeriodMonths").value);
var resultDiv = document.getElementById("result");
// Clear previous results and error messages
resultDiv.innerHTML = ";
// Input validation
if (isNaN(cashInflows) || cashInflows < 0) {
resultDiv.innerHTML = 'Please enter a valid number for Cash Inflows (must be 0 or greater).';
return;
}
if (isNaN(cashOutflows) || cashOutflows < 0) {
resultDiv.innerHTML = 'Please enter a valid number for Cash Outflows (must be 0 or greater).';
return;
}
if (isNaN(timePeriodMonths) || timePeriodMonths <= 0) {
resultDiv.innerHTML = 'Please enter a valid number for the Time Period (must be greater than 0).';
return;
}
var netBurnRate = (cashOutflows – cashInflows) / timePeriodMonths;
var netBurnRateFormatted = netBurnRate.toFixed(2);
var displayMessage = "";
if (netBurnRate > 0) {
displayMessage = "$" + netBurnRateFormatted + " per month (Net Burn)";
} else if (netBurnRate < 0) {
// If inflows exceed outflows, it's not a "burn", but a surplus
displayMessage = "$" + Math.abs(netBurnRate).toFixed(2) + " per month (Net Surplus)";
} else {
displayMessage = "$0.00 per month (Break Even)";
}
resultDiv.innerHTML = displayMessage;
}