Burn rate: What is it, why does it matter, and how to reduce It

How to Calculate Burn Rate for Your Business

On average, the time in between raising a Series B and Series C round ranges between ~15 to 18 months. An important distinction is how the metric should account for only actual cash inflows/outflows and exclude any non-cash add-backs, i.e. a measurement of “real” cash flow. To sustain operations, the start-up must either become profitable or, more commonly, raise equity financing from outside investors before the cash on hand runs out. That’s why the sharks on Shark Tank always ask about a business’s burn rate. They know that it’s an outward sign of the health of your company and that it can indicate a good investment or a bad one.

  • Burn rate is particularly useful when assessed along other line items like monthly revenue and profit.
  • Higher sales and/or prices can increase revenue and offset your current burn rate.
  • It also provides insight into a company’s cost drivers and efficiency, regardless of revenue.
  • Your startup’s burn rate is a key indicator of the strength of both your business plans and business practices.
  • This can’t be greater than the gross burn rate, but it can be less.
  • Unfortunately, they don’t always get paid immediately, which can have severe consequences for their company’s cash flow.

Burn rate is exceedingly important for startups that are using venture capital finance to cover their overhead. And for all of the reasons above, the higher the metric, the worse shape a startup is in. You should ideally target having 12 months or more of runway at any given time, particularly in early seed rounds. That way, you can take the hit of an unexpected expense, a market downturn, or a complication with your product without feeling the heat of a sudden burn rate increase.

How to Calculate Burn Rate

Based on the two data points gathered (-$1.5mm and -$875k), we can estimate the implied cash runway for each. For this start-up, the gross burn amounts to a loss of $1.5mm each month. Note that we are assuming that this is the cash balance as of the beginning https://www.bookstime.com/articles/how-to-calculate-burn-rate-for-your-business of the period. First, we will calculate the “Total Cash Balance” line item, which is simply the existing cash on hand plus the funding raised. Suppose we’re tasked with calculating the burn rate of a SaaS startup using the following assumptions.

How do you calculate project burn rate?

To calculate project burn rate, take the amount of time you wish to measure burn over, then subtract your ending cash from your starting cash for that period.

You’ll need to subtract your operating expenses from your revenue to calculate this figure. It’s important to set benchmarks for your cash burn rate and track them to ensure you’re reaching your goals. In many cases, they might read a declining burn rate as an unwillingness to take the calculated risks and make the necessary maneuvers to help them see the returns they’re looking for. Leadership at every startup should have a solid grip on both of those metrics. They’ll be the primary factors in guiding your ability to accurately and effectively calculate your net burn rate.

How to calculate burn rate

Subtract the $70,000 from the original $250,000, and you’ve burned $180,000. Divide that by six months, and your monthly burn rate is $30,000 over that six month period of time. The burn rate doesn’t breakdown expenses and qualify them individually, either. The burn rate tells you how much cash the company is burning through, but it doesn’t address whether the burn rate is reasonable.

  • Burn rate isn’t the only important metric companies need to keep an eye on there is a wide range of financial KPIs.
  • It’s a good idea to provide that information to your board of directors, as well.
  • Debt and interest will constantly suck cash from your business, so always look for opportunities to refinance.
  • Upon dividing the $100,000 in cash by the $5,000 net burn, the implied runway is 20 months.
  • The Burn Rate measures the rate upon which a company spends its cash (i.e., how quickly a company is spending, or “burning,” its cash).

If you can show them that you have a plan to reduce your burn rate, it will go a long way in securing the investment you need. Burn rate measures how quickly your business is losing money each month. This matters because it helps you know exactly how long you can continue running your business without making any significant changes before you run out of money.

Decrease expenses

However, in a situation where you may lose clients, it can be a misleading view into how much your company is spending per month, and thus can give you an overly optimistic view into your runway. For companies that are seeing a lot of churn, who are navigating a downturn or who are facing uncertain times, founders should have a strong handle on the gross burn number. So again, gross burn rate is the worst case scenario for your cash out date, and net factors in estimates for any income. Both are good to know – you don’t want to kid yourself and you really want to have that honest look at your cash position and how much runway you have.

Burn rate is also important to startups looking for funding that don’t have investors yet. For example, if your monthly expenses are $10,000 and your revenue from sales is $8,000, then your net burn rate is $2,000. That means, barring any other factors (e.g., sales fluctuations, changes in costs), you’ll burn through $2,000 of your cash on hand every month.

In that case, you may use a small business loan or a line of credit to keep the lights on while you build new strategies to start breaking even again. Upon dividing the $100,000 in cash by the $5,000 net burn, the implied runway is 20 months. Think of all the time and money it would take to build that yourself.

The burn rate is used to pinpoint when a company will begin going into debt, expressed as the company’s financial runway. If a burn rate is too high, a company has no choice but to lower its structural costs by reducing what it is spending on staff, housing, marketing, and/or technology. Small businesses have strong revenue months and poor revenue months—even very successful ones. While revenue is obviously a central factor in the health of a business, removing it from the equation will reveal a company’s spending trends.

A company can be profitable on paper and still fail due to a lack of cash. A low burn rate helps to ensure this doesn’t happen to your business. Gross burn rate is helpful if you’re focused on measuring operating expenses—for instance, if you’re looking for ways to cut back spending in your company. Net burn rate is useful if you want to measure profit growth since it shows how much you’ve earned versus how much you’ve spent.

How to Calculate Burn Rate for Your Business