Completing a successful round of fundraising might feel like crossing the finish line, but figuring out how to manage the new funds is just as important. Smart spending comes down to understanding your company’s cash burn rate.
This article explains what burn rate is, why it matters and how to manage your company’s cash burn for more sustainable growth.
What is burn rate?
Cash burn rate is a measurement of how fast a company is spending money. It accounts for both income and expenses.
Calculating burn rate provides another crucial piece of information: your cash runway. Cash runway is the amount of time you can finance operations before running out of money. For instance, if your company raises £2 million in funding and has a burn rate of £100,000 per month, your remaining runway is 20 months.
Your company’s cash burn rate can help you understand:
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How much it costs to finance company operations
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How long you can keep spending before you need more funding
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How much time (and cash) you have to continue experimenting with your product
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How your spending translates to output
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How much revenue you need to become profitable in the near future
Why burn rate matters
Burn rate isn’t a perfect measure of your company’s sustainability; it’s only one of several factors, including market conditions, business strategy and product-market fit. Even so, knowing your monthly burn rate can help you make informed decisions about where to focus your spending and when to start planning your next funding round.
How to calculate your cash burn rate
There are two ways to calculate your burn rate, depending on your company’s current growth stage. If you’re not generating revenue yet, you just need to calculate your gross cash burn rate. If you’re already generating revenue, you can use gross burn to calculate your net burn rate.
Gross burn rate vs. net burn rate
Gross burn is your company’s total monthly expenses, whereas net burn is your gross burn minus revenue.
Gross burn rate is calculated using your average monthly spend over a time period that’s representative of how long you want your company to keep functioning. For example, if you spent £750,000 over the last 12 months and you want to stay in business for another 12 months, your gross burn would be £62,500.
You can then calculate net burn using this formula: Net burn rate equals (=) gross burn rate minus (-) monthly revenue. Using the example above, if your gross burn is £62,500 and you’re generating £20,000 in revenue each month, your net burn rate would be £42,500.
Ready to move on from hypotheticals? Our burn rate calculator is designed to give early-stage startups a clear picture of their cash runway.
Download the free calculatorWhat is a good cash burn rate?
There’s no such thing as a standard or acceptable burn rate for all companies. Your startup’s cash burn rate depends on a combination of several different factors, including:
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Industry or trade
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Business model
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Growth stage
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Market conditions
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Operating expenses
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Investors’ expectations
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Funding raised and current cash reserves
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Spending required to hit your goals and milestones
Keep in mind that you may not always be aiming for a low burn rate. If you don’t spend as much as you need to drive growth, you could fall behind schedule to deliver a product or be unable to market your business effectively. Instead of trying to keep your burn rate below an arbitrary threshold, it’s better to keep an eye on how much you’re spending and learn to manage your company’s cash flow effectively.
Understanding your cash burn rate
When investors ask about your burn rate, they want to know what you’re spending their money on, how those resources are helping your business grow and when they’re likely to see a return on their investment. In other words, are you on track to hit targets with the available finances?
Developing formal processes and using an accounting system can help you manage your budget and burn rate. It’s best practice to review your income statement (or profit and loss statement), balance sheet, cash flow and customer churn in detail every month.
You should also keep track of the costs associated with growing your business, such as customer acquisition, market expansion, product development and software tools (i.e. your tech stack). This will give you a clear picture of where you’re allocating resources and how much you’re spending.
Fixed vs. variable expenses
Tracking your fixed and variable expenses can help you understand the relationship between spending and growth. For instance, if you acquire more customers you’ll probably need to order more stock, resulting in higher variable costs. Or you might need to hire another software engineer to build new product features, bumping up your fixed costs.
| Fixed (overhead) costs | Variable costs | |
| Definition | Costs that stay the same each month, regardless of output or revenue | Costs that fluctuate from month to month |
| Examples | Salaries, office rent, software subscriptions | Marketing and advertising, product stock, consultant fees |
Regularly reviewing expenses can also show you whether you’re overspending – and where to cut back. If you can’t afford to scale back on variable costs like marketing, for example, you could adjust fixed expenses such as office rent. Your burn rate (and remaining cash runway) might change as a result, but at least you’ll be prepared for the shift.
Balancing your cash burn rate
Managing your burn rate is all about identifying what works for your company – and what doesn’t. This requires a certain amount of trial and error, so don’t be afraid to re-evaluate your decisions and adjust your burn rate accordingly.
Although burn rate is a good indicator of your spending habits and cash runway, it’s not the only metric to consider when evaluating startup growth. To optimise your burn rate and scale efficiently, you also need to factor in business goals, financial forecasts and your team’s time and energy.
