How do I calculate the Burn Rate and runway?

published on 01 May 2024

Calculating the burn rate of a startup is straightforward. It represents the monthly reduction in your cash reserves, primarily indicating a company’s cash outflow.

There are two forms of burn rate often mentioned: gross and net. Gross burn rate is your total monthly expenditure, while net burn rate adjusts for revenue, showing actual cash loss per month. However, to streamline, we often just consider the net burn rate, defined as the difference in cash balances between two consecutive months.

Burn Rate Calculation including Investor Funding

You can usually find the necessary figures in a cash flow statement. For a month, the burn rate is the difference between the previous month's and the current month's cash balances.

Burn Rate = Previous month’s cash balance - Current month’s cash balance

A negative or zero burn rate implies your income is equal to or surpasses your expenses. Negative burn rate often occurs with new funding, while a zero rate indicates balanced earnings and spending.

Excluding Investor Funding

To focus on operational performance, exclude investor funding from the calculation:

Burn Rate = (Previous month’s cash balance - VC funding) - (Current month’s cash balance - VC funding)

Average Burn Rate

For an average, sum the monthly burn rates over the desired period and divide by the number of months.

Burn Rate and Startup Runway

Runway is the number of months you have left before your business runs out of cash.

Let's consider a scenario where your startup has $300,000 in the bank now and had $500,000 a month ago:

Burn Rate = Previous Month's Cash - Current Month's Cash Burn Rate = $500,000 - $300,000 = $200,000

Runway = Total Cash Available / Average Burn Rate Runway = $300,000 / $200,000 = 1.5 months

In this scenario, the startup can continue its operations for 1.5 months before it needs to secure additional funding, assuming the burn rate remains constant.

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