Did you know that running out of cash is the number one reason startups fail? While it’s inevitable that some startups won’t succeed in the long run, the truth is plenty of startups go under before they even had a fair chance in the marketplace, simply due to poor financial planning and budgeting.
The best way to avoid this happening to your startup? Calculate burn rate and track cash runway.
What is Burn Rate?
A startup’s burn rate is the rate at which the company is spending its available cash resources, usually tracked by month. Burn rate is a critical metric for all startups to track. Too high a burn rate indicates overspending and possible inefficiencies, while an extremely low burn rate could hint at missed growth opportunities. Tracking your monthly burn rate helps ensure you don’t run out of cash runway while investing in your startup’s growth.
What is Cash Runway?
Cash runway refers to how long a company can operate before it runs out of cash, typically measured in months.
Calculate Burn Rate & Runway, An Example:
| Burn Rate | Jan 2023 | Feb 2023 | Mar 2023 | Apr 2023 |
| Total Cash Balance | $ 2,000,000.00 | $ 2,100,000.00 | $ 2,200,000.00 | $ 2,300,000.00 |
| Total Monthly Sales | $ 20,000.00 | $ 30,000.00 | $ 40,000.00 | $ 50,000.00 |
| Total Monthly Expenses | $ 200,000.00 | $ 210,000.00 | $ 210,000.00 | $ 210,000.00 |
| Net Cash Inflow | $ (180,000.00) | $ (180,000.00) | $ (170,000.00) | $ (160,000.00) |
| Monthly Net Burn Rate | $ (180,000.00) | $ (180,000.00) | $ (170,000.00) | $ (160,000.00) |
| Cash Runway (In months) | 11 | 12 | 13 | 14 |
Download this example as a spreadsheet (.xls)
Definitions
- Cash Balance = amount in Total Bank Accounts on the Balance Sheet
- Total Monthly Sales = amount in Total Income on the P&L
- Total Monthly Expenses = amount in Total Expenses on the P&L
- Net Cash Inflow Monthly = ‘Total Monthly Sales’ less ‘Total Monthly Expenses’
- Net Burn Rate = same as ‘Net Cash Inflow’
- Cash Runway = Monthly Net Burn Rate divided by Total Cash Balance
Calculating and monitoring your burn rate is critical to forecast your startup’s financial health, set optimal budgets, and ensure longevity. Burkland’s fractional CFOs help hundreds of startups measure their burn rate and extend their cash runways. Contact us to request more information about how we can help your startups.