Managing your burn rate can help you increase the likelihood that you’re on a solid track towards long-term growth and success. If your cash flow is positive and can account for unexpected expenses and, ideally, growth, that’s a good place to be. But if your growth isn’t matching the money you’re spending, you’ll quickly be in a bad situation.

• Burn rate isn’t a metric your accounting software will calculate for you directly; but by using your financial statements, you can calculate it easily.
• Note, that there were no cash inflows in the example above – meaning, this is a pre-revenue start-up with a net burn that is equivalent to the gross burn.
• If a start-up is burning cash at a concerning rate, there should be positive signals supporting the continuation of the spending.
• Calculate the total amount of money spent by adding up the amounts in the “Amount Spent” column.
• Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts.

Once the data is entered, users can use Excel’s charting tools to create a graph of the burn rate trends. This will allow them to quickly identify any patterns or changes in spending over time. For example, if the burn rate is increasing, it could indicate that the company is spending more than it is earning. Your startup runway will inform how you hire, develop products, and finance your business in the coming months and years. While it’s easy to assume that you need to reduce your burn rate, it’s not always necessary. It all depends on how you are allocating capital and how this impacts your startup.

How to Interpret Burn Rate?

By the end of this tutorial, you will have a better understanding of how to calculate burn rate in Excel. A startup typically goes into business with funding from investors, often venture capitalists. The startup spends the invested cash to develop and market its product. They may go years operating at a loss before either succeeding (making a profit) or running out of money. The burn rate measures how quickly a company is spending money.

You start with $180,000 on January 1st and end with $60,000 in cash on March 31st, which is the last day of the quarter. Firstly, you need to deduct the ending cash balance from your beginning cash balance. Taking the figures mentioned above, you’ll need to subtract $60,000 from $180,000, so you end up with $120,000. Use this burn rate calculator to see how long it will take your business to reach profitability. This calculation is key to measuring sustainability and is especially helpful for start-ups when it comes to deciding when, where and how much to invest in your business.

How to calculate gross burn rate

Gross cash burn is applicable in positive operating cash flow, breakeven cash flow, and negative operating cash flow situations. Net cash burn applies in a negative operating cash flow situation. If the burn rate begins to exceed its forecast, or if revenue fails to meet expectations, the usual recourse is to reduce the burn rate, regardless of how much money is in the bank. This requires rethinking the startup’s cost structure and usually means reducing staff and/or other major cost drivers, such as office lease, technology, and marketing. A company’s net burn rate, however, is the total amount of money that a company loses each month.

You also need to budget for interest payments once you do start making a profit again. As a result, a company with a high burn rate can find itself scurrying for cash from banks or creditors and get trapped into accepting unfavorable financing terms, be forced to merge, or even go bankrupt. It’s important for investors to monitor a company’s available cash, capital expenditures, and cash flow burn rate before deciding to invest.

Related Reading: Accounting Cycle

The longer stretch of time will affect both how the managers outline the company’s strategy and the amount of money that an investor might be willing to put into the company. Suppose we’re tasked with measuring the burn rate and implied runway of an early-stage start-up, with $500k in existing cash on hand and $10 million in funding raised from venture capital (VC) firms. Finally, users can use Excel’s data analysis tools to compare the burn rate trends to other metrics, such as revenue or profits. This can help them identify any correlations between the two and make more informed decisions about their financial situation.

If your company is rapidly expanding, investors would rather see you bump up your spending to keep pace than cut back. In some cases, a higher burn rate indicates that you’re ready for a higher valuation. Generally speaking, a start-up of this size with $7.5mm in run-rate revenue (i.e., $625k × 12 months) is likely near the midpoint between an early-stage and growth-stage classification. Based on the two data points gathered (-$1.5mm and -$875k), we can estimate the implied cash runway for each. If the monthly cash sales were also considered, we would calculate the “net” variation. Given the amount of funding raised in the previous round, the $10mm, running out of cash in one year is considered fast.

While gross burn rate has specific applications in accounting for startups, net burn rate is more helpful in providing a more unambiguous indication of cash runway. Unless you are an accountant, the term “burn rate” simply refers to net burn rate for all practical purposes. Burn rate is a useful metric for startups and profitable companies alike, however, for some companies turning a profit, burn rate may provide a negative value rather than a positive. This is due to the company making more money than they spent in the previous period This means their accounts had a lower value at the start of the period than it does at the end of the period.

If your business is off to a good start but isn’t turning a profit, you may be able to attract investors looking for high-growth opportunities. Selling shares will give you cash to work with and more time to try new strategies to increase revenue. Monthly operating expenses include everything you spend to keep your business running—rent, utilities, wages, formula for determining burn rate and the rest. Starting capital is the cash balance you first invested in your business—either out of your own pocket, borrowed, or from outside investors. Or, use your total cash at a point in time to find a burn rate over a specific period of time. Burn rate refers to the rate at which a SaaS company depletes its cash pool over a given period.