HOW TO CALCULATE CASH BURN RATE AND RUNWAY

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Cash burn rate and cash runway

Cash is the lifeblood of a business making it essential for owners to track. Calculating burn rate will let you see how quickly your spending money, and how long you can sustain your current level of operations.

Already go the basics covered? Jump ahead and access our free template here to start calculating cash burn rate and runway yourself! 

On the Agenda: 

What is Burn Rate? 

Burn rate is a term to describe a negative cash flow in a business. It is the amount of money spent by a business in a given time period (usually monthly). 

Burn rate is most relevant to newly formed businesses, and small or venture capital-backed businesses, who need to keep a close eye on their spending rate.

These businesses usually go through a period of spending before they see a return, so their spending rate and amount of available of cash is especially important to monitor.

When it comes to calculating burn rate in your business, there are two kinds commonly used: Gross Burn Rate and Net Burn Rate.

Gross Burn Rate focuses solely on outflows from operations whereas Net Burn Rate factors in your revenue. 

How to calculate burn rate:

How to Calculate Gross Burn Rate

The first way to calculate your burn rate is Gross Burn Rate.

Here’s how it works…

Gross Burn Rate Formula:

Gross Burn Rate = Sum of Monthly Operating Expenses 

  • You’ll notice Gross Burn Rate does not consider your current revenue, only your expenses.  
  • Monthly operating expenses include things like wages, rent, marketing expenses, inventory costs, and any other cash outflows related to operations. 

Gross Burn Rate Example

Lets say a company has rent costing $5000, salaries of $10,000 and other operating expenses of $1000 a month.

What is their Gross Burn Rate?

Gross Cash Burn Rate = Sum of Monthly Operating Expenses 

Gross Cash Burn Rate= $5000 + $10,000 + $1,000

Gross Cash Burn Rate = $16,000

From this calculation we can see that this company is spending or ‘burning’ $16,000 a month. 

How to Calculate Net Cash Burn Rate

The second way to calculate burn rate is by using the Net Burn Rate formula.

Here’s how it works…

Net Burn Rate Formula:

Net Cash Burn Rate = Gross Cash Burn Rate – Cash in from Operations

  • Net Burn Rate is similar to Gross Burn Rate, except that the key difference is that Net Burn Rate considers your monthly revenue. 
  • As before, monthly operating expenses include things like wages, rent, marketing expenses, inventory costs, and any other cash outflows related to operations. 

Net Burn Rate Example

Lets say a company has rent costing $5,000, salaries of $10,000, other operating expenses of $1000 a month, and brings in $3000 in net revenue. What is their Net Burn Rate?

Net Cash Burn Rate = Gross Cash Burn Rate – Cash in from Operations

Net Cash Burn Rate= ($5000 + $10,000 + $1,000) – Cash in form Operations

Net Cash Burn Rate = $16,000 – $3,000

Net Cash Burn Rate = $13,000

This company is spending or ‘burning’ $16,000 a month, but they’re also bringing in $3,000 in net revenue, so their Net Burn Rate is $13,000 a month. 

What is Cash Runway? 

Cash Runway is a related term that describes how long a business can sustain its current burn rate.

Like an airplane on a real runway, a business only has so much runway before it is forced to stop, i.e. before it runs out of cash.  

How to Calculate your Cash Runway?

To calculate the Cash Runway we’ll need to first calculate Gross Cash Burn Rate or Net Cash Burn Rate as before. 

Calculating Cash Runway with Gross Burn Rate

Let’s assume a company has $100,000 in their bank, $3,000 monthly revenue, $5,000 in monthly salaries, $5,000 in rent and $1000 in other operating expenses. Cash Runway Formula:

Cash Runway = Cash / Gross Burn Rate

Cash Runway = $100,000 / ($5000 + $10,000 + $1,000)

Cash Runway = $100,000 / $16,000

Cash Runway = 6.25 Months

  • This Cash Runway is 6.25 months meaning the business has enough money to sustain operations – at their current level – for just over 6 months
  • We can also calculate Cash Runway with Net Cash Burn Rate to include revenue. 

Calculating Cash Runway with Net Burn Rate

Again, Let’s assume a company has $100,000 in their bank, $3,000 monthly revenue, $5,000 in monthly salaries, $5,000 in rent and $1000 in other operating expenses. 

Cash Runway = Cash / Net Burn Rate

Cash Runway = $100,000 / ($5000 + $10,000 + $1,000 – $3,000)

Cash Runway = $100,000 / $13,000

Cash Runway = 7.69 Months

  • This Cash Runway is 7.69 months meaning the business has enough money to sustain operations – at their current level – for just under 8 months. 

Your Turn 

Get started calculating Gross Cash Burn Rate, Net Cash Burn Rate and Cash Runway with our free template here! 

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Until next time!

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