Back to Blog
Peaks and valleys are the norm in business. A big part of whether your company has staying power is whether you can survive those tougher times when your cash inflows plateau. Let’s get into what burn rate is and why understanding your cash burn rate is essential to making it through.
Once you know your company’s burn rate, your cash flow management can be more effective. At Forwardly, we’re strong believers that the more you know (cue the shooting star), the better you can position your business for growth and stability.
What is the burn rate for a business?
Your burn rate is the money you spend to keep your company going during a given period. It is almost always measured monthly. You can also think of it as your monthly net-negative cash flow. Although you might often hear references to burn rate or cash burn in the context of startups, this metric is just as useful and important for businesses that have been around for years.
Startups pay extremely close attention to it because:
- Many businesses take several years to be profitable. That means startups must be diligent about how quickly they’re burning through the money in the bank because the company’s gross cash burn is the same as its net cash burn. In other words, there’s no money coming in to offset any gross operating expenses.
- It is a metric that investors care a lot about. They want to know how far their existing funding will go — and how far the money they’re raising will go, too.
But these things are relevant to your mature business, too.
Also read: Key Financial Metrics Every Founder Should Know About
Why should you care about it?
The above is a really just a fancy way to get at understanding a business’ “runway.” And that’s important for every company. You want to know how long your company can last if you never make a cent again (Don’t worry, you will! But here are some tips so you can hedge against worst-case scenarios.)
Runway is how long your business will be able to stay open at that current burn rate. That’s why every small- and medium-sized business needs to care about burn rate and runway
Calculating your burn rate and runway
Luckily, this important metric isn’t too hard to figure out. We’ll calculate the monthly burn rate.
Step 1: Pick a period on your cash flow statement. Find the starting point of your cash balance, then locate the ending point for the period.
Step 2: Subtract the starting point from the endpoint. Then, divide the difference by the number of months in the period you’ve chosen.
Step 3: Access your bank balance. Divide your balance by the burn rate. Your product is your minimum runway, based on your cash burn. (Note that this number assumes stable net cash burn, aka you don’t bring in any additional revenue).
An example of calculating burn rate
Let’s say we’re examining the first quarter of the year. Your cash position at the beginning of January was $100,000 and at the end of March, you finished up at $70,000. Right now, April 1, you have $280,000 in the bank.
Calculating monthly burn rate:
$100,000 (starting balance)- $70,000 (finishing balance) = $30,000
$30,000 / 3 (months) = $10,000
Monthly burn rate = $10,000
Calculating remaining runway:
$280,000 (cash in the bank) / $10,000 (monthly burn rate) = 28
Remaining runway = 28 months
The bottom line
Understanding and managing your burn rate is crucial for the longevity and success of your business, whether you’re a startup or a well-established company. By keeping a close eye on your monthly expenditures and calculating your runway, you can make informed decisions that ensure your business remains financially healthy. Regularly monitoring your cash flow, being diligent about expenses, and planning for the future will help you avoid unexpected financial challenges. Remember, a clear grasp of your burn rate not only helps you survive tough times but also positions your business for growth when opportunities arise.
