What is Burn Rate?
How to Calculate Burn Rate
If you have a cash flow statement nearby, calculating your burn rate is quite simple. The formula is:
For example, let’s imagine your new company has just raised $1,000,000 from a venture capital firm. Nicely done! This inflow of cash means you can hire new staff, invest in technology, upgrade equipment, move into a bigger office, or make some other type of big investment into your business.
Of course, as you start to make these investments, you are going to notice your cash balances beginning to shrink. It’s essential to be tactical about where (and when) you are investing your new cash and plan for the timing of your next round of fundraising. Keeping a close watch on your burn rate will help to ensure your funds aren’t depleting too quickly.
Let’s assume your company had $500,000 in reserve before you received your venture capital funding. With the infusion of $1 million, your starting cash balance is $1.5 million. Three months later, you check your cash balance to find that it’s dropped to $1.2 million. Enter these numbers into the burn rate formula and you discover your business is currently burning $100k per month.
Sample size is key here. If you’re trying to calculate burn rate over a month or two, any unusual spending is going to skew your read on how fast you’re actually burning through your funds.
For example, assume you spent an average of $100k over the last three months. Say we spent $50k and in the first month, $50k in the second, and $200k in the third. If we calculate the burn rate for any one of these months alone, we will get an inaccurate picture of how long we can expect our funds to last. It’s wise to calculate burn rate often and to use a longer, representative period of time to get a realistic perspective.
Using Burn Rate to Your Advantage
New companies, particularly startups in high-growth fields, can take several years to become profitable. To get through those early, lean years, these businesses rely heavily on investments from Venture Capital firms. This can often take several rounds of funding, which owners will spend on projects to yield profits in the future. Investors will be watching this spending very closely.
A company’s burn rate provides insight into how a business uses its cash and whether a business may be too free or too stingy with its spending. A significantly high or an extremely low burn rate may signal that the business owner is effectively managing the cash to meet the goals of the company.
The cash runway, also included with the calculator, gives business owners a timeline of how long their current reserves will last. Rounds of funding tend to occur every 12 to 18 months, so business owners can use their burn rate and cash runway to plan accordingly.
Crunch Your Numbers
Tools developed just for you: see return on ad spend, P&L forecasting, and more.
The Burn Rate Calculator
Insert your company cash balances from the previous months to calculate your burn rate and cash runway.