How to Calculate Your Company’s Burn Rate
Calculate your company's burn rate to gain critical insight into financial spending and optimize cash flow for stability.
A company’s burn rate represents the speed at which it spends its available cash. It is a fundamental metric for businesses, particularly startups and those in growth phases, to monitor financial health. Understanding this rate is essential for financial planning and long-term sustainability. Tracking how quickly cash reserves diminish helps businesses make informed decisions about operations, investments, and fundraising.
Core Components of Burn Rate
Understanding burn rate begins with identifying a company’s cash inflows and outflows. Cash inflows represent all money coming into the business, including revenue from sales, investment capital, or funds from debt financing. These inflows directly bolster a company’s cash reserves.
Conversely, cash outflows are all money leaving the business to cover its operational and capital needs. Common examples include payroll expenses (salaries, wages, and associated employer taxes like FICA). Other significant outflows are rent payments for office space, utility costs, marketing and advertising expenditures, and the purchase of equipment or technology. Burn rate calculations focus specifically on these actual cash movements, distinguishing them from accrual-based accounting figures.
Calculating Gross Burn
Gross burn rate measures the total amount of cash a company spends over a specific period, without considering any cash coming into the business. To calculate gross burn, a company aggregates all cash outflows for a given timeframe, typically a month, and then divides that total by the number of months in the period.
The formula for gross burn is: Total Cash Outflow / Number of Months. For instance, if a company spent $150,000 in cash over a single month, its gross burn rate would be $150,000 per month. A company spending $450,000 over a three-month quarter would have a monthly gross burn rate of $150,000.
Calculating Net Burn
Net burn rate provides a more comprehensive picture by factoring in both cash outflows and cash inflows. This calculation reveals the actual rate of cash depletion after accounting for all money earned or received. The net burn rate indicates whether a company is profitable on a cash basis or how much outside funding it requires to sustain operations.
The formula for net burn is: (Total Cash Outflow – Total Cash Inflow) / Number of Months. If a company has total cash outflows of $150,000 in a month but generates $50,000 in cash inflows, its net burn rate would be ($150,000 – $50,000) / 1 month = $100,000 per month. This figure directly reflects the cash deficit a company faces.
Connecting Burn Rate to Cash Runway
The burn rate directly influences a company’s cash runway, which is the amount of time a business can continue operating before exhausting its cash reserves. Understanding this relationship is important for strategic financial management and long-term viability. The cash runway is calculated by dividing the company’s current cash balance by its net burn rate.
For example, if a company has a current cash balance of $600,000 and a net burn rate of $100,000 per month, its cash runway would be $600,000 / $100,000 = 6 months. This calculation provides a clear timeline for when a company might need to secure additional funding or adjust its spending. Monitoring cash runway allows businesses to proactively plan for future financial needs and make timely operational adjustments.