If you’re an entrepreneur or a startup founder, you’ve probably heard the term “burn rate” before. The burn rate is the rate at which your company is spending its cash reserves.
It’s an important metric to track, especially for early-stage startups still trying to find their footing in the market.
Fortunately, there’s a tool that can help you calculate your burn rate: the burn rate calculator. This blog post explains the burn rate, how to calculate it, and how to interpret it.
What Is Burn Rate?
Burn rate is the rate at which your company is spending its cash reserves. It measures how quickly your company is burning through its available cash.
Burn rate is typically expressed as a monthly figure, and it’s calculated by taking your monthly expenses and subtracting them from your monthly revenue.
For example, if your monthly expenses are $50,000 and your monthly revenue is $25,000, your burn rate would be $25,000 per month. You’re burning through $25,000 of cash reserves each month.
If your burn rate is too high, you may run out of cash before generating enough revenue to sustain your business.
On the other hand, if your burn rate is too low, you may need to invest more in your business to grow and succeed.
Difference Between Burn Rate and Net Income
It’s important to note that the burn rate is not the same as net income or profit.
- Net income is the amount your company earns after all expenses have been paid.
- Burn rate is the rate at which your company spends its cash reserves.
A company can have a high burn rate and still be profitable or have a low burn rate and be unprofitable.
How to Calculate Burn Rate (Step-By-Step)
Calculating your burn rate is a fairly simple process. Here’s a step-by-step guide to help you calculate your burn rate:
- Determine Your Monthly Expenses – List your monthly expenses, including salaries, rent, utilities, marketing, and other overhead expenses.
- Calculate Your Monthly Revenue – Next, calculate your monthly revenue. This includes all your company’s money from sales, subscriptions, and other income sources.
- Subtract Your Monthly Expenses From Your Monthly Revenue – Once you have your monthly expenses and revenue, subtract your monthly expenses from your monthly revenue. The result is your burn rate.
- Monitor Your Burn Rate – It’s important to monitor your burn rate regularly, such as monthly or quarterly. This will help you understand how your burn rate changes over time and whether you need to change your spending or fundraising strategies.
- Use a Burn Rate Calculator – If you prefer a tool to calculate your burn rate, many burn rate calculators are available online to help you do this. Simply input your monthly expenses and revenue; the calculator will do the rest.
How to Interpret Burn Rate: Implied Runway Analysis
Interpreting your burn rate is just as important as calculating it. One way to interpret your burn rate is by conducting an implied runway analysis.
This analysis helps you understand how long your company can continue to operate before it runs out of cash based on your current burn rate.
Here’s how to conduct an implied runway analysis:
- Calculate Your Current Burn Rate – Use the steps outlined in the previous section to calculate your current burn rate.
- Determine Your Current Cash Reserves – Look at your company’s balance sheet to determine how much cash you currently have.
- Divide Your Cash Reserves by Your Burn Rate – Divide your current cash reserves by your current burn rate. The result is the number of months your company can continue to operate before it runs out of cash.
For example, if your current burn rate is $25,000 monthly and you have $250,000 in cash reserves, your implied runway is ten months ($250,000 divided by $25,000).
It’s important to note that an implied runway analysis is just an estimate, and many factors can impact your company’s cash flow and burn rate.
However, it can be useful for understanding your company’s financial health and making better decisions about spending and fundraising.
If your implied runway is short, consider raising more funding or cutting costs to extend your runway. On the other hand, if your implied runway is long, you may have more flexibility to invest in growth and expansion.
By conducting an implied runway analysis, you can understand how long your company can continue to operate before it runs out of cash and make better decisions about spending and fundraising.
Ready to Start Using Your Burn Rate to Your Advantage?
Burn rate is a critical metric for any startup or entrepreneur to track. It helps you understand how quickly your company is burning through its available cash and can help you make better decisions about spending, fundraising, and growth.
By calculating your burn rate and monitoring it over time, you can conduct an implied runway analysis to understand how long your company can continue to operate before it runs out of cash.
This information is crucial for making strategic decisions about spending and fundraising.
Are you ready to start using your burn rate to your advantage? If you need help calculating and understanding your burn rate, Mighty Startup can help. Get started.