Calculate your cash burn rate

A startup’s burn rate is effectively the amount of money it is spending in excess of its revenue every month. There are a couple of different ways to calculate burn rate. The easiest method is to take the average decrease in the company’s cash position over the past several months - exclusive of any financing events. For example, if a company had $300,000 in the bank, then $275,000 the next month, then $250,00 the last month, then the metric would be $25,000 a month. 

Don’t forget to include other, non-checking account balances. Your payment processor, a money market account, a saving account, etc. all likely contain dollars that should be included in the analysis.

One method of calculating burn rate uses a startup’s income statement. Income statements show a company’s income and expenditures, and follows a formula: Net Income = (Revenue + Gains) – (Expenses + Losses). Normally your startup accountant sends you an income statement every month, so one way to determine the metric every month is to just look at the net income on your income statement - and that’s conceptually how much your bank account balance should be decreasing every month..

However, your income statement will also include things that are accrued, as well as items that are capitalized. Accrual accounting recognizes revenue when it’s earned and records expenses when they are incurred, rather than when money changes hands. So a SaaS company that signs a 1-year, $60,000 contract to provide services for a year would recognize $5,000 each month, even if the customer paid the full $60,000 at the beginning of the year. A startup that invests heavily in equipment will capitalize those expenses, and expense the cost over the useful life of the equipment, even though the startup paid for the equipment in full. So the income statement doesn’t necessarily show how much actual cash the startup has at a particular moment.

Calculating a burn rate using a startup’s cash flow statement gives a different picture, and at Kruze Consulting we calculate our clients’ metrics both ways. The cash flow statement shows the actual amount of money that  is entering and leaving your startup in a given period, and shows you how much cash your startup has on hand at a given time. Typically startups have a negative cash flow because they don’t make money in their early years. The negative total from the cash flow statement is how much money the startup is spending each month. 

With both the income statement and cash flow methods, you’ll need to average the numbers over a specific period to get a burn rate. For many companies, we calculate the metric on a six month average. That “smooths out” a lot of the spending and gives a good picture of the company’s actual burn rate. Some companies prefer a three-month average, which will show more of the spending ups and downs, and makes sense if you are rapidly growing revenue, adding headcount, etc. But whichever method you choose, you should look at it every month. It’s a good idea to provide that information to your board of directors, as well.

Gross burn rate is the most conservative way for a startup to calculate your monthly net cash out the door. Your gross burn rate is essentially all the money the company spends each month, including operating expenses, taxes, registrations, etc. Some people like to add in any capital expenditures, which is perfectly valid. But the gross number does not include any revenue, which is why it provides the most conservative cash-out date for startups.It’s the total amount of money going out the startup’s door each month.

So again, gross burn rate is the worst case scenario for your cash out date, and net factors in estimates for any income. Both are good to know – you don’t want to kid yourself and you really want to have that honest look at your cash position and how much runway you have. If you have other questions on calculating or managing burn, cash out dates, or runway, contact us.