Cash Burn Rate calculators

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What is 'Burn Rate'?

The term ‘burn rate’ is used in business to describe how quickly a new business is spending its venture capital in order to pay for overhead. The new business is spending its venture capital because it has not yet generated positive cash flow from its operations, therefore, cash burn rate is a measure of negative cash flow. It is quoted by ‘cash spent per month.’

E.g. If a company is spending $1 million/ month, the company’s burn rate is $1 million. The burn rate is used by investors and startups to track the amount of cash that the business is spending monthly. The burn rate of a company is also used to measure the company’s runway; the amount of time it will take the company to run out of money. E.g. If in the bank, a company currently has $1, and it goes through $100,000 per month, its burn rate is $100,000 and its runway is 10 months.

Net Burn vs. Gross Burn

There are two kinds of burn rates: gross burn and net burn. A business’ net burn is the sum of money that a business loses every month. A business’ gross burn is the sum of operating costs the business incurs through expenses every month.

For example, if a startup pays $5,000 on rent, $10,000 a month on server costs, and $15,000 a month on its engineers’ wages, the company’s gross burn rate is $30,000. However, the company’s net burn would be different if it were already producing revenue. If the business operates at a loss, with Costs of Goods Sold at $10,000 and revenues of $20,000, the business would still work to decrease its overall burn. In this case, the business’ net burn would be $20,000.

This is a very important distinction, because it affects the amount of money a company has in the bank and therefore its financial runway. Even if it's spending $30,000 gross, the actual amount its losing per month is $20,000. This means, for example, that if it had $100,000 in the bank, its runway would be five months rather than around three months. This dictates the way in which the managers outline the company's strategy and the amount that an investor would want to invest in the company.

This is an integral distinction, as it has an effect on the amount of money a company actually has in the bank, hence its financial runway. Even if the company is spending $30,000 gross, the actual amount that it is losing each month is $20,000. This signifies, for example, that if in the bank it had $100,000, the company’s runway would be five months rather than roughly three months. This controls the way in which the decision-makers outline the business’ strategy and the amount that an investor may potentially invest in the company.

However, at the point where revenue does not meet expectations or the burn rate starts to exceed burn forecasts, the usual option is to reduce the burn rate, regardless of the money you have in the bank. Normally, this means cutting down staff.

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