Accounting & Taxation

Calculating Burn Rate and Cash Runway

Ah, the exhilarating journey of building a business! ! As Reid Hoffman aptly describes it - starting a company is like jumping off a cliff and assembling a plane on the way down. And while you are at it, it is imperative to keep an eye on the fuel that keeps the engine roaring - your business finances!

What is Burn Rate

It's the rate at which your startup consumes cash each month. Think of it as your plane’s  fuel consumption—an essential metric for ensuring your journey doesn't leave you stranded in financial oblivion.

Calculating it is simpler than navigating a GPS: subtract the cash balance at the end of one month from the previous month. Voila! 

Calculating Gross Burn

Gross burn refers to the money spent each month on running the business i.e. monthly operating costs such as salaries, rent, marketing costs etc.

Gross Burn = Monthly Operating Costs

Calculating Net Burn

Net burn refers to the difference between cash inflow and cash outflow from operations

Net Burn = monthly revenue - monthly expense

Let’s say you run a business selling artisanal chocolate bars, the sales receipts of the month will increase the cash balance while the operating costs such as rent, vendor payments, staff salaries and packaging costs will decrease the cash balance. 

Gross Burn Rate = (Cash outflow of Month 1 + Cash outflow of Month 2)/ number of months

Gross Burn Rate = ($60,000 + $90,000)/2 = $50,000/2 = $25,000

Net Burn = (Cash inflow of Month 1 - Cash outflow of Month 1) +(Cash inflow of Month 2 - Cash outflow of Month 2)/ number of months

Net Burn = {($80,000-$60,000) + ($60,000-$90,000)} / 2

Net Burn = {20,000+(-30,000)}/2 = -$5,000

What is Cash  Runway

Now, imagine your cash balance as the fuel tank. How long before it runs dry and your plane  glides to an unwanted halt? That's where the cash runway comes in - measuring the number of months left before your business  finances hit rock bottom. To determine the cash runway, your burn rate is required. 

Calculating Cash Runway

Divide your total cash by the average burn rate, and presto! You've got the number of months before your coffers empty.

Cash runway = Total capital / monthly operating expense 

In the above example of the artisanal chocolate bar business, let’s say you infused capital of $100,000. In that case, the cash runway will be calculated as follows:

Cash runway = $100,000/$25,000 = 4 months

InRole: Your Trusted Financial Partner 

Knowing your burn rate and runway isn’t just about numbers on a screen; it's your startup's lifeline. Reducing burn rates might seem like the obvious solution, but it requires informed decision making. Whether charting your path to funding or proving your revenue prowess, these metrics guide your plane through the journey of entrepreneurship. 

Imagine having a seasoned CFO at your disposal, monitoring your burn rate, deciphering your runway data, and offering insights. With InRole's fractional CFO services, you'll receive comprehensive financial analysis, proactive suggestions to fine-tune your spending strategies, and forecasts that help steer your startup toward financial success.

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