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Burn Rate Example

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Revenue $1,000 Cash $15,000

Operating Expenses ($1,500) Gross Burn Rate 10 months
Operating Profit ($500) Net Burn Rate 30 months

This file is for educational purposes only. E&OE

Corporate Finance Institute®

https://corporatefinanceinstitute.com/
What is cash burn ratio?
Burn rate refers to the rate at which a company uses up its su
he burn rate is typically used to describe the rate at which a n
Burn rate is the rate at which a company is losing money. It is
The Net Cash Burn KPI refers to the amount of money by wh
o determine the burn rate for a selected period, you find the
Net Burn Rate is the rate at which a company is losing money
Burn Rate is a metric to assess the performance of a certain p
Gross Burn Rate can be calculated by subtracting the total am
Burn rate is the rate at which a company is losing money. It is

Reducing burn rate means more runway for your startup.

...
4 Ways to Reduce Startup Burn Rate and Scale Like a Tech Su
1. Focus on return on investment.
2. Hire the right people at the right time.
3. Have an MVP before seeking financing.
4. Select the right space to scale.

According to https://startupdefinition.com/runway it's “the am

In the physical world, a runway is a takeoff strip for airplanes

Earned Value Management (EVM) helps project managers to

How can cost overruns be avoided?
Others solutions for preventing overruns include: Thorough p
What is your monthly burn and how much runway do you ha
Calculating your startup runway or the amount of time befor
What is a financial runway?
'Runway' refers to the amount of time a company has before
What is a startup runway?
In the physical world, a runway is a takeoff strip for airplanes
ch a company uses up its supply of cash over time. It's the rate of negative cash flow, usually quoted as a monthly rate, bu
scribe the rate at which a new company is spending its venture capital to finance overhead before generating positive ca
mpany is losing money. It is typically expressed in monthly terms. E.g., "the company's burn rate is currently $65,000 per
e amount of money by which cash decreases in a set period.
lected period, you find the difference between the starting and ending cash balances for the period. Then we divide that
a company is losing money. It is calculated by subtracting its operating expenses from its revenue. It is also usually stated
performance of a certain project with respect to the original budget. In short, burn rate is the rate at which the project is
by subtracting the total amount spent in the previous month from the total amount spent this month. Then divide the re
mpany is losing money. It is typically expressed in monthly terms. E.g., "the company's burn rate is currently $65,000 per

unway for your startup.

te and Scale Like a Tech Superstar

ion.com/runway it's “the amount of time until your startup goes out of business, assuming your current income and expe
a takeoff strip for airplanes. ... In the startup world, runway is how long your company can survive if your income and exp

helps project managers to measure project performance. It is a systematic project management process used to find vari

erruns include: Thorough planning before the project begins. Give some room for possible change orders. ... If necessary
w much runway do you have?
r the amount of time before you're broke is easy to do. Take your beginning cash balance (e.g., $200,000) and divide that

ime a company has before it runs out of cash. If your net burn rate is $10,000 a month and you have $100,000 in the ban

a takeoff strip for airplanes. ... In the startup world, runway is how long your company can survive if your income and exp
d as a monthly rate, but in some crisis situations, it might be measured in weeks or even days
generating positive cash flow from operations. It is a measure of negative cash flow. The burn rate is usually quoted in te
currently $65,000 per month." In this sense, the word "burn" is a synonymous term for negative cash flow

d. Then we divide that total by the number of months in the selected period
It is also usually stated on a monthly basis. It shows how much cash a company needs to continue operating for a period
at which the project is spending its original budget
nth. Then divide the result by the total amount spent in the previous month and multiply by 100 to convert it to a percen
currently $65,000 per month." In this sense, the word "burn" is a synonymous term for negative cash flow. It is also meas

rrent income and expenses stay constant. Typically calculated by dividing the current cash position by the current month
f your income and expenses stay constant. When companies raise money, they are literally trying to increase their runwa

ocess used to find variances in projects based on the comparison of worked performed and work planned. EVM is used o

orders. ... If necessary, use a cost-plus bid for projects that present uncertainty.

0,000) and divide that number by your monthly net burn rate. This number is the number of months before you are com

ve $100,000 in the bank, you've got 10 months to start generating positive cash flow. When calculating your runway, it's im

f your income and expenses stay constant. When companies raise money, they are literally trying to increase their runwa
 is usually quoted in terms of cash spent per month

operating for a period of time.

convert it to a percentage.
sh flow. It is also measure for how fast a company will use up its shareholder capital.

by the current monthly burn rate.

o increase their runway ("We spend $100k/month and have $400k in the bank.

planned. EVM is used on the cost and schedule control and can be very useful in project forecasting.

hs before you are completely broke -- the end of your runway

ing your runway, it's important to use your net burn rate.

o increase their runway (“We spend $100k/month and have $400k in the bank
How Long Is My Startup Runway? A Guide To Calculating And Managing Monthly Burn Rate

Forbes Technology Council

Aaron Vick Forbes Councils Member
Forbes Technology CouncilCOUNCIL POST | Paid Program
Innovation

POST WRITTEN BY

Aaron Vick

Aaron Vick is Chief Strategy Officer for Cicayda, a legal tech firm that combines cloud-based eDiscovery software with legal expertise.

uncaptioned

Imagine this: A plane is in the process of taking off and is picking up speed as it prepares to launch itself into the bright blue beyond of the sky

This is an analogy for a startup runway. A startup runway is the number of months a company can operate before it runs out of money, and it’

In other words, think of it as a roadmap to your success through a few quick, easy calculations.

Calculating The Gross Burn Rate

The gross burn rate is the total amount of cash spent each month. For instance, if you begin the year with $200,000 in your bank account and

The formula is: (original cash balance - remaining balance)/12 months = gross burn rate

Example:

($200,000 - $50,000)/12 months = gross burn rate

$150,000/12 Months = gross burn rate

$12,500 = gross burn rate

Calculating The Net Burn Rate

The net burn rate measures the difference between cash out and cash in; basically, it's the rate you’re losing money. Profitable companies ha

This is always equal to your net income on the profit and loss (P&L) statement and is calculated much the same -- add all expenses for the mo
Calculating The Startup Runway

Calculating your startup runway or the amount of time before you’re broke is easy to do. Take your beginning cash balance (e.g., $200,000) a

This number is the number of months before you are completely broke -- the end of your runway. Not only does it give you peace of mind to k

Stagnating cash is just as bad as not having enough.

Ideal Startup Runway Length

Most startups are wise to prepare for a runway that’s around 18 months long. This gives you 12 to 15 months to target and hit strong goals an

Making Your Startup Runway Last

One of the most common reasons startups fail is because they run out of cash. This is when budgeting can help a great deal to keep your bur

Here are some tips on how to manage your monthly burn rate so that your tech firm doesn't go in the red:

• Examine the impacts of spending: Before making a large purchase, review how the loss of cash would affect your bottom line, and whether y

If you are hesitant about the purchase and it stretches your budget, delay a month if you can get by without making the purchase to avoid affe

• Plan around the next year: Planning for the future as well as the present will keep your cash flow in check. You can do this by creating predic

How To Budget for Your Startup Runway

A spreadsheet is all you need in order to create an effective budget. Make one tab for expenses and the other for revenue. For each expense

If you can’t come up with a good reason, then consider eliminating that expense -- mark it on the expense sheet -- and move on to the next ite

After creating this macro budget, create a micro budget for each department in your company, which is helpful for growth planning. Because t

Last but not least, create best-case and worst-case budgets to cover all of your bases. You want to be ready for every possibility, and a worst

Start these budgets while your company is still fine and you’ll have a much easier time with them as your company hopefully begins to grow. G

To keep yourself motivated, there are many apps and software services available to keep your budget in check. Google Sheets is a great alte

Conclusion

Overall, making your startup runway last is all about using logic over emotion when deciding on what to spend on and when to abstain. The lo
Even though many startups fail, don’t let that discourage you on your own mission to create a lasting, healthy business. By following the tips in

Burn Rate
Glossary

Burn Rate measures how quickly your cash holdings are decreasing. Gross Burn Rate is th
Measuring Burn Rate allows you to forecast when you’ll run out of money (if you’re burning
Calculating Burn Rate
Net Burn Rate is simple to calculate. It’s equal to your Net Income on the P&L statement, a
Gross Burn Rate is the total amount you’re spending each month. Add all expenses togethe
Managing your Burn Rate
Knowing your burn rate helps you understand your runway, or the amount of time before yo
It might seem like Net Burn Rate is more important because most companies are happy if t
Say your Net Burn Rate is reasonable because you’ve had a couple good months of sales,
Balancing the desire to grow with building a sustainable business is tough. As soon as you
Over the last year we’ve gone from weeks of runway to being profitable by keeping our gross burn rate low, and turning around our net burn ra

How quickly can you burn?

Most startups want to keep close to a year of runway available at all times. If you’re under 6
When you’re raising funding, VCs will look at your burn rate to determine how quickly you’ll
Unfortunately, cash doesn’t tend to stay in the bank for long. Mark Suster suspects that mo
And if the market is good, more investment is available and you’re growing quickly (50-75%
But if your growth isn’t matching the money you’re spending, you’ll quickly be in a bad situa

A GUIDE TO UNDERSTANDING, C
PATRICK CAMPBELL
Updated On: June 12, 2019
If any unfortunate high school kids find this article, hoping it holds the secret to reducing their own personal ra
If, on the other hand, you're the CFO of a burgeoning startup concerned with the speed at which your company
What is burn rate?
Burn rate is the speed at which a company is using up its cash reserves to fund overheads. It's also referred to a
You can't afford to ignore your burn rate
The fact that 82% of startups fail because of cash flow problems tells a story of just how often cash flow is taken for granted by young
Burn rate identifies necessary budget cuts
A company's burn rate can hint at overspending. And if you're running a startup, you're almost certainly oversp
Branding: With so many branches and a varied ROI, branding can often be a point of overspend for new com
Vendor Relationships: Many young companies let inertia set in early with vendor relationships, even when r
Office Space: Your lust for brand new office space may prevent you from enjoying it for long. Lengthy lease
Presuming you spot it fast enough, a high burn rate due to factors like these can be a blessing in disguise, point
And if the burn is coming from that corner office, it might be time to move back to the basement for a while.
Burn rate informs how much revenue is needed
Put simply, you can’t go bankrupt if you make more money than you spend. Beyond that, responsible growth and planning (and so the
For funded startups, the relationship of burn rate to revenue is especially important. You'll have used funding c
You should ideally target having 12 months or more of runway at any given time, particularly in early see

Company A has prepared their cash runway fairly well, and was able to cope with a few unforeseen spikes in th
High burn rates ARE bad for business
Burn rate is exceedingly important for startups that are using venture capital finance to cover their overhead. A
And burn rates aren't just for startups either; mature businesses can also find the metric useful as a means of me

Companies A, B & D have the right idea, but Companies C & E clearly need a change of approach.
How to calculate burn rate
Burn rate calculation is not quite as tough as Fermat's Last Theorem, but a robust understanding of both the cor
Gross burn calculation
Gross burn paints a picture of how efficient your company is, regardless of revenues streaming in:
Gross burn rate = cash/monthly operating expenses
Having understood this basic formula for gross burn, you then need to incorporate your monthly overhead costs
Net burn calculation
Net burn shows the rate at which the company is losing money; if your revenues increase, your net burn rate wi
Net burn rate = cash/monthly operating losses
Now that you can compute your burn rate, how do you know what rate is acceptable?
There's no one-size-fits-all answer to this question. All companies should maintain a burn rate that's sustainable relative to their revenu
You should expect a measure of fluctuation as you scale and as you deal with bumps in the road, but it should r
How to reduce your burn rate
Your burn rate is intimately tied to almost all commercial activity in your business. This means that, in case the
1. Reduce churn rate: Even if your monthly overheads haven't been going up, if your company is churning customers like crazy, you
2. Focus on core competencies: For companies young and old, trying to be everything to everyone can be a p
3. Defer or reduce expenses: Which expenses aren't directly leading to more revenue? You could make the c
4. Cut off products that don’t sell: Many companies offer products for the sake of variety, even if they don’
Burn rate can be an anxiety-provoking statistic in the early stages of a funded startup. Maintaining a low burn r
Consistently monitoring your burn rates is not only good for your company's bottom line; it's excellent for focu
Company A has prepared their cash runway fairly well, and was able to cope with a few unforeseen spikes in their bu
High burn rates ARE bad for business
Burn rate is exceedingly important for startups that are using venture capital finance to cover their overhead. And for
And burn rates aren't just for startups either; mature businesses can also find the metric useful as a means of measurin

Companies A, B & D have the right idea, but Companies C & E clearly need a change of approach.
How to calculate burn rate
Burn rate calculation is not quite as tough as Fermat's Last Theorem, but a robust understanding of both the core burn
Gross burn calculation
Gross burn paints a picture of how efficient your company is, regardless of revenues streaming in:
Gross burn rate = cash/monthly operating expenses
Having understood this basic formula for gross burn, you then need to incorporate your monthly overhead costs to att
Net burn calculation
Net burn shows the rate at which the company is losing money; if your revenues increase, your net burn rate will decr
Net burn rate = cash/monthly operating losses
Now that you can compute your burn rate, how do you know what rate is acceptable?
There's no one-size-fits-all answer to this question. All companies should maintain a burn rate that's sustainable relative to their revenues: if y
You should expect a measure of fluctuation as you scale and as you deal with bumps in the road, but it should remain
How to reduce your burn rate
Your burn rate is intimately tied to almost all commercial activity in your business. This means that, in case the burn
1. Reduce churn rate: Even if your monthly overheads haven't been going up, if your company is churning customers like crazy, your revenue
2. Focus on core competencies: For companies young and old, trying to be everything to everyone can be a problem
3. Defer or reduce expenses: Which expenses aren't directly leading to more revenue? You could make the case that
4. Cut off products that don’t sell: Many companies offer products for the sake of variety, even if they don’t sell. N
Burn rate can be an anxiety-provoking statistic in the early stages of a funded startup. Maintaining a low burn rate allo
Consistently monitoring your burn rates is not only good for your company's bottom line; it's excellent for focusing y
 Companies A, B & D have the right idea, but Companies C & E clearly need a change of approach.
How to calculate burn rate
Burn rate calculation is not quite as tough as Fermat's Last Theorem, but a robust understanding of both the core burn
Gross burn calculation
Gross burn paints a picture of how efficient your company is, regardless of revenues streaming in:
Gross burn rate = cash/monthly operating expenses
Having understood this basic formula for gross burn, you then need to incorporate your monthly overhead costs to att
Net burn calculation
Net burn shows the rate at which the company is losing money; if your revenues increase, your net burn rate will decr
Net burn rate = cash/monthly operating losses
Now that you can compute your burn rate, how do you know what rate is acceptable?
There's no one-size-fits-all answer to this question. All companies should maintain a burn rate that's sustainable relative to their revenues: if y
You should expect a measure of fluctuation as you scale and as you deal with bumps in the road, but it should remain
How to reduce your burn rate
Your burn rate is intimately tied to almost all commercial activity in your business. This means that, in case the burn
1. Reduce churn rate: Even if your monthly overheads haven't been going up, if your company is churning customers like crazy, your revenue
2. Focus on core competencies: For companies young and old, trying to be everything to everyone can be a problem
3. Defer or reduce expenses: Which expenses aren't directly leading to more revenue? You could make the case that
4. Cut off products that don’t sell: Many companies offer products for the sake of variety, even if they don’t sell. N
Burn rate can be an anxiety-provoking statistic in the early stages of a funded startup. Maintaining a low burn rate allo
Consistently monitoring your burn rates is not only good for your company's bottom line; it's excellent for focusing y

How to Calculate Burn Rate

There are several different ways to calculate burn rate, some more complicated than others. All methods te
g Cash) / Number of Months = Monthly Burn Rate
Start by defining the time period you will be assessing. Burn rate is a current metric, meaning you want to l
Even though burn rate is usually calculated monthly, you want to look at more than the previous month’s fi
Now that you’ve defined the period you are assessing, you will find the starting cash and ending cash balances for that period. To keep things
Now, determine your cash balance on March 31, the last day of the quarter. Again, you will get this numbe
Next, you will subtract your ending cash balance from your beginning cash balance:
160,000 – $100,000 = $60,000
Finally, you will divide the difference by the number of months you are assessing. In this example, that num
 $60,000 / 3 = $20,000
This means your business’s burn rate is $20,000/month.
Potential investors might prefer to use a different gross burn rate or net burn rate calculation, which only ta

Using Burn Rate to Determine Your Cash Runway

Most small business owners don’t like to think about a scenario where their business might run out of cash
This is where your cash runway comes into play. Your business’s cash runway tells you how many months
h / Monthly Burn Rate = Cash Runway
Continuing with our example above:
he 3-month period) / $20,000 (burn rate) = 5 (runway)
If all things remain equal in our example business—meaning if sales or collections don’t decrease and exp

Managing Your Business’s Burn Rate and Cash Run

The higher your cash runway—or the lower your burn rate—the more likely it is your business will survive.
Increase revenue… without increasing expenses. The easiest way to increase revenue without increas
Decrease your expenses. Many small businesses have inefficiencies in their expenses. Start by analyzing the dues and subscriptions line item

Another area where many small businesses are inefficient is in advertising and marketing. Although you absolutely must invest in advertising

Thoroughly analyze each line item on your P&L, and eliminate the expenses that aren’t absolutely necessa
Consider refinancing debt. Your cash runway is affected not only by your expenses, but also by other cash expenditures. If your debt paymen
Use a cash management system to proactively plan for positive cash flow. Many small business owners think a low burn rate, high cash runw

Knowing Your Burn Rate Can Save Your Business

Calculating the burn rate in your business isn’t difficult. Although it can be uncomfortable to face the reality
Any number of factors—many of them outside of your control—can lead to an unexpected downturn in revenue and cash flow in your busines
 with legal expertise.

bright blue beyond of the sky. If the runway is too short, the plane will come to a halting stop. If the runway is too long, then it would be a waste of land and

it runs out of money, and it’s one of the most important calculations an early-stage startup founder makes. If a tech startup founder gets this calculation co

00 in your bank account and at the end of the year you have $50,000, then that is a gross burn rate of $12,500.

ey. Profitable companies have a negative net burn rate each year because they bring in more than they spend.

- add all expenses for the month and subtract all income in hand for each month. This is done monthly because the variability in revenue needs to be taken
h balance (e.g., $200,000) and divide that number by your monthly net burn rate.

give you peace of mind to know this number, but forecasting into the future enables you to invest and budget wisely.

arget and hit strong goals and milestones and three to six months to raise more funds. If a startup is under six months of runway without hitting those milest

a great deal to keep your burn rate low, as well as outsourcing to lower costs.

ur bottom line, and whether your present revenue would be able to make up for the loss. If the numbers add up and it is a low-risk purchase, then there is n

ng the purchase to avoid affecting your monthly burn rate. This will keep you from making on-the-fly decisions and help you consider the future welfare of yo

can do this by creating predictive models to get a good sense of probabilities. Having a separate expense account for overhead items helps with this!

revenue. For each expense that you log, ask yourself how each expense helps your business.

- and move on to the next item.

growth planning. Because they drive sales, marketing and revenue should be your first focus.

very possibility, and a worst-case budget acts as a safety net.

y hopefully begins to grow. Getting in the habit of having these budgets in hand is priceless when it comes to growing your company and preparing for any

Google Sheets is a great alternative to Excel because your numbers are backed up in the cloud automatically and can be shared with others on the team ea

and when to abstain. The long-term health of your company is worth it.
iness. By following the tips in this article, you can and will be one of the ones that survive through careful planning, budgeting, analyzing and always weighi

oss Burn Rate is the total amount of cash you’ve spent each month. Net Burn Rate is the difference
y (if you’re burning more than you’re making) or when you’ll be able to expand.

P&L statement, and usually stated monthly. To calculate it from scratch, add all expenses for the m
l expenses together to calculate the total cash you’re burning.

nt of time before you go broke if you continue on the same trend. Your runway is the money you’ve g
nies are happy if they have lots of runway and are growing. But keeping Gross Burn Rate low make
d months of sales, so you increase your expenses (and therefore your Gross Burn Rate) expecting t
h. As soon as you have that VC money in the bank, the desire to spend it and operate on a high bur
urning around our net burn rate. You can learn more about the process of becoming profitable in our blog post. (Spoiler: we cut salaries and all unnecessar

s. If you’re under 6 months away from Zero Cash Day, you should be looking to either cut costs dra
how quickly you’ll spend their investment capital. For example, if you’re only burning $100k a month
r suspects that most startups will spend any VC money within 12 – 18 months of investment. If you’v
ng quickly (50-75% annually) it’s “worth it” to keep that burn rate high.
y be in a bad situation. Runway will decrease, investors won’t be as keen and you’ll need to make c

NDING, CALCULATING, AND IMPROVING

g their own personal rate of being burned by friends, these are not the burn rate calculations you're looking for.
at which your company is tearing through its funding, these are the exact burn rate calculations you need to get a handle on it.

ds. It's also referred to as a measure of net-negative cash flow. If your company has cash reserves amounting to $250,000 with a b

taken for granted by young businesses. Understanding burn rate is key to both recognizing areas for improvement within your company and planning for th
 almost certainly overspending somewhere. The following three areas are likely contenders.
overspend for new companies.
ationships, even when rates need to be renegotiated or new partnerships sought out.
for long. Lengthy leases and slower-than-expected staff growth can turn a luxurious workspace into a burn-rate albatross.
ssing in disguise, pointing you toward more effective replacements for needless expenses. If your burn rate's up because of over
basement for a while.

wth and planning (and so the success of your business) are not possible without knowing how much money is left after expenses to reinvest in your compan
u'll have used funding cash to build the company in the early stages, with the aim to reach positive cash flow before the money ru
particularly in early seed rounds. That way, you can take the hit of an unexpected expense, a market downturn, or a complication

w unforeseen spikes in their burn rate during their first year. Their runway will not last much longer, though.

cover their overhead. And for all of the reasons above, the higher the metric, the worse shape a startup is in.
useful as a means of measuring cash reserve, building and targeting later investments. Nevertheless, all this talk is purely academ

of approach.

standing of both the core burn formula and its variation is critical for business success.

monthly overhead costs to attain a picture of your net burn. You can do this with the following formula:

se, your net burn rate will decrease.

inable relative to their revenues: if you're growing at a rate of knots and there's inbound interest in funding your company, then a slightly higher burn rate ca
the road, but it should remain steady and in the shade of your revenue.

s means that, in case the burn needs to die down, strategies to reduce it can come from a number of different angles.
ng customers like crazy, your revenue will suffer, and your burn rate will go up. An out-of-control churn rate is fatal. Use these tried-and-true strategies to ke
g to everyone can be a problem. Pursuing every idea that seems halfway decent will lead to funding that's spread much too thin, s
? You could make the case that while the $700/month on gourmet coffee for the staff is going the distance and bringing in value,
ariety, even if they don’t sell. Not all may be worth keeping, and the company may benefit from (even temporarily) cutting them.
Maintaining a low burn rate allows all overheads to be accounted for and growth to be steady.
e; it's excellent for focusing your attention on areas in your company that need a rethink (growing churn rates, huge expenses, or
reseen spikes in their burn rate during their first year. Their runway will not last much longer, though.

heir overhead. And for all of the reasons above, the higher the metric, the worse shape a startup is in.
as a means of measuring cash reserve, building and targeting later investments. Nevertheless, all this talk is purely academic if w

ng of both the core burn formula and its variation is critical for business success.

hly overhead costs to attain a picture of your net burn. You can do this with the following formula:

r net burn rate will decrease.

elative to their revenues: if you're growing at a rate of knots and there's inbound interest in funding your company, then a slightly higher burn rate can be sa
ad, but it should remain steady and in the shade of your revenue.

s that, in case the burn needs to die down, strategies to reduce it can come from a number of different angles.
mers like crazy, your revenue will suffer, and your burn rate will go up. An out-of-control churn rate is fatal. Use these tried-and-true strategies to keep it unde
ryone can be a problem. Pursuing every idea that seems halfway decent will lead to funding that's spread much too thin, sluggish
ould make the case that while the $700/month on gourmet coffee for the staff is going the distance and bringing in value, the roc
ven if they don’t sell. Not all may be worth keeping, and the company may benefit from (even temporarily) cutting them.
ning a low burn rate allows all overheads to be accounted for and growth to be steady.
excellent for focusing your attention on areas in your company that need a rethink (growing churn rates, huge expenses, or ineffe
ng of both the core burn formula and its variation is critical for business success.

hly overhead costs to attain a picture of your net burn. You can do this with the following formula:

r net burn rate will decrease.

elative to their revenues: if you're growing at a rate of knots and there's inbound interest in funding your company, then a slightly higher burn rate can be sa
ad, but it should remain steady and in the shade of your revenue.

s that, in case the burn needs to die down, strategies to reduce it can come from a number of different angles.
mers like crazy, your revenue will suffer, and your burn rate will go up. An out-of-control churn rate is fatal. Use these tried-and-true strategies to keep it unde
ryone can be a problem. Pursuing every idea that seems halfway decent will lead to funding that's spread much too thin, sluggish
ould make the case that while the $700/month on gourmet coffee for the staff is going the distance and bringing in value, the roc
ven if they don’t sell. Not all may be worth keeping, and the company may benefit from (even temporarily) cutting them.
ning a low burn rate allows all overheads to be accounted for and growth to be steady.
excellent for focusing your attention on areas in your company that need a rethink (growing churn rates, huge expenses, or ineffe

others. All methods tell you how quickly your business is using up its cash reserves, so let’s look at the easiest burn

meaning you want to look at a recent time period.

e previous month’s financial data to get a good calculation. This will help you capture expenses and other outlays of
r that period. To keep things easy, let’s say you are doing this exercise in early April, meaning you are assessing the first quarter of the year. Determine yo
ou will get this number from your balance sheet. Make a note of this number as well—let’s say it’s $100,000.

his example, that number is 3:

culation, which only takes into account operating expenses. For the purposes of managing your small business, thou

Runway
might run out of cash, but this is a real possibility. Several things can cause your business to run out of cash: a down
ou how many months you can operate on your existing cash reserves. The cash runway calculation is:

on’t decrease and expenses or other cash outputs don’t increase—this business has enough cash to sustain it for five

d Cash Runway
business will survive. There are several simple ways to decrease your business’s burn rate and improve your cash ru
venue without increasing expenses is to improve your gross profit margin. Analyze your pricing—many small busines
es and subscriptions line item on your profit and loss statement. Are you paying for subscriptions you don’t use? Even if it’s only $5-$10/month, those unuse

y must invest in advertising and marketing in your business to ensure continued growth, you also must know if you are getting a return on these investmen

n’t absolutely necessary, don’t produce income, and don’t improve your business’s efficiency or your customers’ expe
ditures. If your debt payments are high, refinancing that debt could help improve your cash runway. It’s best to refinance debt before you need to—don’t wa
w burn rate, high cash runway, and positive cash flow are things that just happen at some point in the future, if they are lucky and their business is profitabl

Business
able to face the reality of a high burn rate (and a short cash runway), it is much better to know these metrics in your b
nd cash flow in your business. When you address your burn rate and cash runway proactively, while things are going well in your business, you will be bette
ould be a waste of land and resources.

nder gets this calculation correct, the company's success is far more likely!

n revenue needs to be taken into account since if you’re making less than the previous month, your burn rate will be greater.
 y without hitting those milestones, then costs need to be cut right away.

sk purchase, then there is nothing to worry about!

sider the future welfare of your company carefully.

items helps with this!

mpany and preparing for any unpleasant surprises.

d with others on the team easily.

analyzing and always weighing the present with the future.

e is the difference between cash out and cash in. Profitable companies have a negative net burn rat

expenses for the month and subtract all income for the month. If you’ve spent $500k this month, and

he money you’ve got in the bank, divided by your monthly net burn rate. This gives you the number
urn Rate low makes your company more sustainable long term.
n Rate) expecting to grow. If all of a sudden your sales decrease, you won’t have a built in cushion a
erate on a high burn rate is ignited.
 salaries and all unnecessary expenses to lower the gross burn rate)

ither cut costs dramatically or raise funding.

ning $100k a month, and are looking to raise $5 million, it would take you 4 years to spend all that ca
nvestment. If you’ve got money, you want to spend it.

u’ll need to make changes to stay sustainable.

ROVING YOUR BURN RATE

to get a handle on it.

ing to $250,000 with a burn rate of $50,000 per month, your company will run out of cash in five months.

company and planning for the future. Especially if you're a funded startup, ignoring your burn rate is not an option.
rn-rate albatross.
ate's up because of overspend on branding, consider organic means of building your brand profile instead of paid advertisements.

es to reinvest in your company.

ow before the money runs out. Sometimes called “cash runway,” this metric tells you how long the money will last at your curre
nturn, or a complication with your product without feeling the heat of a sudden burn rate increase. Pilot has an excellent line of

his talk is purely academic if we don't have a sure handle on the way we actually calculate burn rate itself.

a slightly higher burn rate can be satisfactory. If growth is stalling, then you need to look at reducing burn.

ried-and-true strategies to keep it under control.

spread much too thin, sluggish performance, and a high burn rate for low return. Return to your core competencies, pare down t
e and bringing in value, the rock-climbing scholarships probably aren't.
mporarily) cutting them.

rates, huge expenses, or ineffective products). If your company isn't feeling the burn, you're heading in the right direction.
k is purely academic if we don't have a sure handle on the way we actually calculate burn rate itself.

y higher burn rate can be satisfactory. If growth is stalling, then you need to look at reducing burn.

rue strategies to keep it under control.

much too thin, sluggish performance, and a high burn rate for low return. Return to your core competencies, pare down the featu
inging in value, the rock-climbing scholarships probably aren't.
y) cutting them.

huge expenses, or ineffective products). If your company isn't feeling the burn, you're heading in the right direction.
 y higher burn rate can be satisfactory. If growth is stalling, then you need to look at reducing burn.

rue strategies to keep it under control.

much too thin, sluggish performance, and a high burn rate for low return. Return to your core competencies, pare down the featu
inging in value, the rock-climbing scholarships probably aren't.
y) cutting them.

huge expenses, or ineffective products). If your company isn't feeling the burn, you're heading in the right direction.

ok at the easiest burn rate calculation:

s and other outlays of cash that don’t occur monthly. It will also help make sure your calculations aren’t skewed by an
er of the year. Determine your cash balance on January 1 by reviewing your balance sheet. You want to use the cash balance on your balance sheet rathe
t’s $100,000.
 small business, though, the calculation presented above will give you the information you need to help you manage

un out of cash: a downturn in sales, an upswing in expenses to promote growth without enough capital to back those

sh to sustain it for five months.

improve your cash runway:

—many small business owners compete on price, when service, convenience, or some other factor might be the bigg
y $5-$10/month, those unused subscriptions add up.

a return on these investments. If you don’t know what activities in advertising and marketing are generating revenue, you could be throwing away cash you

your customers’ experience.

before you need to—don’t wait until you are already experiencing a cash flow crisis.
nd their business is profitable. You can proactively plan for all three of these things by using a cash management system that prioritizes savings and proac

ese metrics in your business and address them before they become a problem.
ur business, you will be better able to weather any storms your business encounters.
gative net burn rate because they are bringing in more than they are spending.

0k this month, and brought in $250k in cash income, your monthly burn rate is $250k. Note that this

s you the number of months until Zero Cash Day (aka Doomsday).

a built in cushion anymore – and your runway will shrink quickly!

o spend all that cash. Why raise so much now? What’s going to change?
 of paid advertisements. If it's because you're getting a bad rate from a vendor, use it as an opportunity to shake things up.

y will last at your current burn rate.

as an excellent line of runway calculators.

mpetencies, pare down the features of your service, and stick to what's essential: efficiency is the fastest way to douse the flames

e right direction.
ies, pare down the features of your service, and stick to what's essential: efficiency is the fastest way to douse the flames of a hig
ies, pare down the features of your service, and stick to what's essential: efficiency is the fastest way to douse the flames of a hig

s aren’t skewed by an extraordinarily good (or bad) sales month. So, for the purposes of this example, let’s look at th
on your balance sheet rather than using your bank statement, because your balance sheet will include any uncleared checks or deposits. Make a note of th
 to help you manage your cash flow. It takes into account not only your operating expenses, but also other cash outla

capital to back those expenses, and slow collections are just a few examples of this. It’s important to know exactly ho

ctor might be the bigger value differentiator for your customers. There could be room for you to increase your prices

be throwing away cash your business needs.

prioritizes savings and proactively plans for positive cash flow. The Profit First cash management system does this by helping you prioritize savings, leverag
50k. Note that this cash income needs to actually be in your hand – not deferred revenue from future
 shake things up.

way to douse the flames of a high burn rate.

ouse the flames of a high burn rate.
ouse the flames of a high burn rate.

ample, let’s look at the last quarter, or three-month period.

r deposits. Make a note of this number—let’s say it’s $160,000.
t also other cash outlays such as loan payments and owner’s draws.

ant to know exactly how long your business can survive on the cash you have on hand.

increase your prices, and a price increase of even 1%-3% could have a huge impact on your margins while having a

ou prioritize savings, leverage your existing money habits, and keep your cash reserves out of sight and out of mind until you need them.
evenue from future bookings.
margins while having a minimal impact on the price each individual customer pays. Any improvement to your gross pr
ment to your gross profit margin will help you improve your business’s cash runway and lower your burn rate.
your burn rate.