In the world of business, especially for startups and rapidly growing companies, understanding how quickly you are spending your available cash is crucial for survival and strategic planning. This is where the Cash Burn Rate comes into play.
What is Cash Burn Rate?
Cash Burn Rate, often simply called "burn rate," measures the rate at which a company is spending its cash reserves to cover its operating expenses before it begins to generate positive cash flow. It's essentially the speed at which a company is losing money from its available capital.
There are two common ways to look at burn rate:
Gross Burn Rate: This is the total amount of cash a company spends in a given period (usually a month). It represents all operating expenses.
Net Burn Rate: This is the more commonly used metric. It's the difference between the cash a company is spending and the cash it is bringing in. It shows the actual reduction in cash reserves over a period.
Why is Cash Burn Rate Important?
Calculating and monitoring your burn rate is vital for several reasons:
Financial Planning: It helps businesses forecast how long their current cash supply will last, enabling better budgeting and fundraising strategies.
Operational Efficiency: An high burn rate might signal inefficiencies or unsustainable spending habits that need to be addressed.
Investor Relations: Investors heavily rely on burn rate to assess a company's financial health and its ability to reach profitability or secure further funding.
Decision Making: It informs critical decisions about hiring, marketing spend, product development, and expansion plans.
How to Calculate Cash Burn Rate (and Runway)
Our calculator uses the most common approach, focusing on the Net Burn Rate and calculating the company's Cash Runway.
1. Net Burn Rate Calculation:
The formula is straightforward:
Net Burn Rate = Monthly Operating Costs - Monthly Revenue
In our calculator, this translates to:
Net Burn Rate = (Input: Total Monthly Operating Costs) - (Input: Total Monthly Revenue)
A positive result means you are burning cash; a negative result means you are generating a cash surplus (which is ideal, but not technically "burning").
2. Cash Runway Calculation:
Once you know your Net Burn Rate, you can calculate your Cash Runway – the amount of time (in months) your company can continue to operate before running out of cash, assuming current spending and revenue levels remain constant.
The formula is:
Cash Runway (in months) = Current Cash on Hand / Net Burn Rate
Using our calculator's inputs:
Cash Runway = (Input: Current Cash on Hand) / (Calculated Net Burn Rate)
A longer runway provides more operational flexibility and time to achieve milestones.
Example Scenario:
Let's consider a hypothetical startup, "Innovate Solutions," to illustrate the calculation:
This means Innovate Solutions is burning through $30,000 of its cash reserves each month and, at its current rate, will run out of money in approximately 6.7 months. This information is critical for them to plan their next funding round or find ways to increase revenue or decrease costs.
This calculator provides an estimate for informational purposes. Actual financial situations may vary. Consult with a financial professional for personalized advice.
function calculateBurnRate() {
var monthlyOperatingCosts = parseFloat(document.getElementById("monthlyOperatingCosts").value);
var monthlyRevenue = parseFloat(document.getElementById("monthlyRevenue").value);
var cashOnHand = parseFloat(document.getElementById("cashOnHand").value);
var burnRateResultElement = document.getElementById("burnRateResult");
var runwayResultElement = document.getElementById("runwayResult");
// Clear previous results
burnRateResultElement.innerHTML = "–";
runwayResultElement.innerHTML = "–";
// Validate inputs
if (isNaN(monthlyOperatingCosts) || isNaN(monthlyRevenue) || isNaN(cashOnHand) ||
monthlyOperatingCosts < 0 || monthlyRevenue < 0 || cashOnHand = 0) {
burnRateResultElement.innerHTML = "$" + netBurnRate.toFixed(2) + " / month";
} else {
// If revenue exceeds costs, it's not burning cash in the negative sense
burnRateResultElement.innerHTML = "Surplus: $" + Math.abs(netBurnRate).toFixed(2) + " / month";
}
// Calculate Cash Runway
var cashRunway = "–"; // Default value
if (netBurnRate > 0) { // Only calculate runway if there is a positive burn rate
cashRunway = cashOnHand / netBurnRate;
runwayResultElement.innerHTML = cashRunway.toFixed(2) + " months";
} else if (netBurnRate === 0) {
runwayResultElement.innerHTML = "Infinite (breaking even)";
} else {
runwayResultElement.innerHTML = "N/A (generating surplus)";
}
}