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Use our cash burn rate calculator to measure your startup’s recent cash burn rate and estimated cash runway. To use the calculator, you’ll need your company’s cash position for the past 3 months and the amount of capital you’ve raised over the past several months.
Burn rate measures how much cash a startup loses over a given time period, and is typically measured as the dollars decreased over a month. Because venture capital backed companies usually operate at a loss and rely on VC funding to support their operations, burn rate is a metric closely tracked by experienced founders and investors. This number, calculated on a monthly basis, is the primary input that goes into the formula to calculate a startup’s zero cash / cash out date / runway.
In general, this metric is a negative number (as in most startup’s have their bank account go down every month), but it’s often expressed without a negative sign (“-”) or parentheses. If your startup is actually generating positive cash flow every month from operations, make sure you adequately disclose this to investors and other players in the startup ecosystem! Since most VC backed startups lose money, you will be in a unique minority position that many investors won’t instinctively expect.
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.
The reason for using the gross calculation is that for startups, revenue can be very volatile. For example, you may get a few customers and find out your product needs changes, so it could be months of product updates before you get more customers. Again, it’s a good idea to look at gross two ways: Don’t include revenue at all for the gross metric, and factor in some conservative revenue projections for a second burn rate, called net burn rate. That gives you the worst-case scenario along with a less conservative projection that considers your startup’s income. Both those can be used to generate zero cash dates that will help you fine-tune your operating plan and decide when to start fundraising again.
In mid-2022, we are seeing some serious increases to customer churn for some of our consumer businesses - this means that the revenue that they’ve been counting on isn’t so ‘in the bank’ if you will. This is where the gross numbers are very helpful – they provide a true, worst-case scenario that can be used to decide if/how/when cuts will need to be made.
Of course, you want to look forward as accurately as possible. Best practice for companies that are growing, investing more and more aggressively on R&D or marketing, etc., is to create a financial model that projects your monthly ending bank account balances. Startups need to have an incredibly detailed view into the cashout date, and a solid set of projections is the best way to do it. And it’s great financial hygiene to compare the ‘budget to actuals’ - i.e. the actual results against your startup’s financial plan. Here are some tips on how to build a startup budget.
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.
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