Calculating cash burn rate: What it is + formula

Cash burn rate is one of the most important metrics for startups to track. If you don’t pay attention to it, your business could run out of capital unexpectedly, even as it approaches profitability.

In this guide, we’ll explore what cash burn rate is, why it matters, and how to calculate it. We’ll also provide an automated tool to help streamline the tracking process and discuss ways to factor the metric into your financial planning.

What is cash burn rate?

Cash burn rate is the speed at which your company uses its cash to cover ongoing costs. It allows you to determine the time you have left before you run out of funds, also known as your cash runway.

This is a crucial data point for strategic leadership, as your startup generally must become cash flow positive or complete a round of fundraising before its runway expires to continue operating.

Types of burn rates

Gross burn 

Your gross burn rate is the total amount of cash you spend on operations each month before accounting for revenue or other cash inflows.

For example, say you collect $6,000 and spend $10,000 in January, resulting in a net cash outflow of $4,000. In this scenario, your monthly gross burn rate would be $10,000.

Net burn 

Your net burn rate is the total decrease in your cash balance after accounting for any cash inflows.

Let’s refer to the same example from the previous section, in which you collected $6,000, disbursed $10,000, and netted a negative $4,000 during the month of January.

In that scenario, your net monthly burn rate would be $4,000.

How to calculate cash burn rate

Companies typically calculate cash burn rate on a monthly basis. This is largely because the typical cash runway for early-stage startups is often around 18 to 36 months.

Importantly, the calculation should focus on cash flows from operations, rather than from financing activities like venture capital fundraising.

The cash burn rate formula

The cash burn rate formula typically refers to the formula for net burn, which is what determines your cash runway.

With that in mind, the traditional cash burn rate formula for a given period is:

‍Net Cash Burn Rate = (Starting Cash Balance – Ending Cash Balance) ÷ Length of Period in Months

To remove the impact of any venture capital inflows during the period, simply subtract them from your ending cash balance like so:

Net Burn Rate = (Starting Cash Balance – [Ending Cash Balance – Venture Capital Inflows]) ÷ Length of Period in Months

Meanwhile, there’s no real formula for gross burn beyond adding up your total cash outflows during the period in question.

Cash burn rate calculator

Use the above calculator to determine your startup’s gross burn, net burn, cash runway, and cash out date, which is the day your runway is set to expire based on your current financial trajectory.

To get started, simply enter your current cash balance, monthly operating costs (gross burn), and monthly cash inflows, if any.

Relationship between burn rate and startup runway

Burn rate and startup runway go hand in hand. Your burn rate is how quickly your company uses cash, while your runway is how long reserves will last at that pace.

How to calculate startup runway using net burn rate

To manually calculate your startup runway using net burn rate, apply the following formula:

Startup Runway = Current Cash Balance / Average Monthly Net Burn Rate

For example, if your startup has $200,000 in cash reserves and an average monthly burn rate of $10,000, your estimated runway would be 20 months.

Using cash burn analysis to make financial decisions

On its own, burn rate can’t provide a complete picture of your company’s financial health. For example, many startups intentionally maintain high burn rates to help accelerate growth.

That said, cash burn analysis can be invaluable for informing various strategic decisions. For example, here are three potential applications:

• Evaluate overall profitability: Burn rate analysis can tell you how much revenue your business needs to generate to reach profitability. It also helps you assess whether you’ll achieve positive cash flow before your current runway ends.
• Identify operational inefficiencies: Cash burn analysis can uncover spending that isn’t meaningfully contributing to growth. For example, that might include redundant software subscriptions or ineffective marketing tactics.
• Adjust spending strategically: Monitoring burn rate helps you match spending to your current runway and growth objectives. For example, founders who know they’re at risk of a cash shortfall can reduce discretionary costs to preserve capital.

Accounting software can help streamline cash burn analysis by organizing financial data and generating key reports automatically. For example, Zeni can maintain real-time cash flow and P&L statements.

What makes cash burn rate so important for startups?

Your cash burn rate tells you how long your startup will be able to maintain liquidity at its current trajectory. This is important for determining when you may need to alter your strategy or raise additional funding to sustain operations.

Venture capital investors also rely heavily on burn rate and runway metrics when evaluating your business and negotiating deals.

Get automated calculations of your startup’s crucial financial metrics

Tracking your startup’s net cash burn rate is essential for managing runway effectively, helping to guide your fundraising efforts and various other aspects of liquidity maintenance.

Zeni’s AI bookkeeping software can help you monitor cash burn and other key performance indicators in real time. It also comes with ongoing support from an expert finance team, who can help you translate your results into better strategic decisions.

‍