Enter your parameters in the following Burn Rate and Cash Runway Calculator:
This burn rate and cash runway calculator calculates the gross burn rate, net burn rate, and cash runway time in months.
What is Burn Rate?
Burn rate is a metric that measures how quickly a company is spending its available cash. It represents the rate at which a company’s cash reserves are “burning” or being used up before generating positive cash flow. The burn rate provides insight into a company’s cash needs and how long it can sustain operations with its current cash balance.
Types of Burn Rates
There are two main types of burn rates:
1. Gross Burn Rate
Gross burn rate calculates the total monthly operating expenses of a company. It represents the overall cash outflow each month without factoring in any revenue or cash inflows.
2. Net Burn Rate
Net burn rate calculates the net monthly cash outflow after accounting for monthly revenues or cash inflows. It represents the true cash loss each month after sales and other revenues are taken into account.
Burn Rate Formula
The formula to calculate gross burn rate is:
Gross Burn Rate = Total Monthly Operating Expenses
The formula to calculate net burn rate is:
Net Burn Rate = Total Monthly Operating Expenses – Total Monthly Revenue
Use the above burn rate calculator to estimate these values.
What is Cash Runway?
Cash runway is the length of time a company can continue operating before it runs out of money.
Cash runway refers to the number of months a company can continue operating with its current burn rate and available cash before it runs out of money. It’s calculated by dividing the cash balance by the monthly burn rate.
Cash runway = Cash Balance / Monthly Burn Rate
The runway metric highlights imminent risks and the need for funding based on spending rates. You can use the above cash runway calculator to estimate this value.
Importance of Burn Rate
Monitoring the burn rate is crucial for any business to understand its cash flow needs. Here are some reasons why burn rate matters:
1. Evaluates runway
Measures how many months a company can operate before needing more funding based on the current spending rate.
Helps businesses budget and plan for future cash requirements. A high burn rate may require additional financing.
Allows comparison of spending levels to competitors. A high rate may indicate waste that needs to be addressed.
4. Growth planning
Helps ensure that expansion plans are sustainable and funded properly.
5. Investment decisions
Burn rate indicates financial health to investors and lenders. A high burn rate may deter potential investors if not justified.
Carefully tracking and managing the burn rate is essential for any business to maintain adequate cash reserves and plan for long-term success.
Frequently Asked Questions
How do you calculate the burn rate?
The burn rate is calculated by taking the change in cash balance over a set time period and dividing it by the number of months. The formula is:
(Beginning Cash Balance – Ending Cash Balance)/Number of Months
This measures the average monthly cash outflow.
What is a good burn rate?
A good benchmark for burn rate is 2–5% of available cash per month. However, an acceptable level can vary significantly by industry and stage of business. Early-stage startups often have very high burn rates as they build infrastructure and acquire customers.
How can you reduce the burn rate?
Some ways to reduce the burn rate include cutting discretionary spending, reducing headcount, renegotiating contracts and leases, limiting marketing, and postponing any major capital expenditures. The focus should be on reducing variable costs as much as possible.
What is a safe cash runway?
Most businesses want to maintain a cash runway of at least 6-12 months for stability and flexibility. However, early-stage startups may plan for a shorter 3-6 month window between funding rounds. The ideal runway provides sufficient operating time between major financing events.
Proper monitoring of the burn rate and cash runway gives businesses valuable visibility into their cash needs and sustainability. Carefully managing monthly spending levels ensures adequate liquidity, avoids potential waste, and maximizes the operating runway. Tracking both gross and net burn rates provides insight into both operational costs and overall profitability.