How to Calculate and Reduce Burn Rate for Your Startup

A company can invest time and some resources looking for places they can reduce expenses. One way to keep a close eye on this is by hiring a bookkeeper or Bookkeeping vs. Accounting investing in expense-tracking software. They can show you patterns in your spending that may be problematic and need optimization. For instance, if rent and utilities are too expensive, you can consider moving operations to a different building. A high burn rate indicates that a company is spending too much money too fast and could enter a state of financial distress.

Labor costs and productivity

This calculation gives a more realistic view of unearned revenue financial health and sustainability. When you’re starting your business, tracking your burn rate is important for knowing how long your cash can last. Using accounting software can help you track those expenses and revenue to more easily calculate burn rate and other metrics. Improve your cash flow with invoices, payments, and expense tracking.

How to Calculate Project Burn Rate: A Complete Guide

A six-month average can be useful if you’ve paid a lot of one-time expenses that won’t reoccur. Once you know how long your runway is, you’ll know when you need to start raising more cash. You should probably start fundraising when you have about 10 months of runway left, and some more conservative founders start even earlier. If you’re down to six months, you really need to start raising money. So burn rate and runway are two very important concepts that startup founders need to understand. Burn rate measures how fast a company spends its cash reserves to pay for operating expenses, including salaries, overhead costs like office space, marketing, raw materials, and inventory.

What is an implied cash runway?

Sometimes there are also clauses in place that allow for layoffs and pay cuts if a company is experiencing a high burn rate. While getting this result from a burn rate calculator may sound like a dream, really low burn rates can also be a bad sign. Using the above example, if we have a starting capital of $15,000 and a net burn rate of $3,000, we will eat through our reserves in 5 months. Effective deal origination strategies help businesses maintain a healthy burn rate and avoid running out of cash before achieving profitability. If you’d checked your project burn rate weekly, you could’ve gotten ahead of the overspending earlier on—well before you overspent by $3,300. While this weekly rate keeps you on track for your five-month timeline, you might consider reducing next week’s spending to $4,000 to build a buffer against unexpected costs.

Learn more about Bench, our mission, and the dedicated team behind your financial success. Matt Jacobs has been working as an IT consultant for small businesses since receiving his Master’s degree in 2003. While he still does some consulting work, his primary focus now is on creating technology support content for SupportYourTech.com. While the two terms may sound alike, they provide two very different measurements about a business’s finances.

Burn rates aren’t just for startups!

You can find all the information you need to measure burn rate burn rate formula on your cash flow statements. That makes Bond Collective the wise choice for entrepreneurs, startups, digital nomads, and businesses of all sizes who want to keep their overhead low while maximizing their space. Even enterprises and large businesses are discovering the benefits of moving a few teams — or even all their employees — into coworking spaces like Bond Collective. As you can see from the information above, keeping your burn rate as low as possible is always a good idea. While the above calculation is simple enough, it’s when we get into burn rate runway that things get a little more complicated.

Offering free trials or ‘freemium’ versions of a product or service can increase revenue without increasing expenses. For example, if a company has a gross burn of $125, 000 per month and $40, 000 in monthly revenue, the net burn rate would be $85, 000 per month. Then, calculate the total number of hours worked in a month across your team. Finally, divide your total monthly costs by the total number of labor hours worked in the month.

• It’s worth noting that while ‘back of the napkin’ math can provide a rough estimate, the true burn rate calculated by a CFO offers the precision and insights needed for sound financial decision-making.
• Or, use your total cash at a point in time to find a burn rate over a specific period of time.
• To reduce costs without impacting productivity, you need to improve efficiency.
• Gross burn rate gives you  a clear picture of how much cash you’re spending each month.

It is calculated by subtracting the company’s total revenue from its expenses during a specific period. The key to managing burn rate is to spend efficiently without compromising growth and future profitability. At the most basic, burn rate is a measure of negative cash flow (how much money you’re losing each month). For example, if your startup spends $10,000 every month on office space, computers, and wages, but sales only amount to $8,000 in that same month, then your burn rate is $2,000 ($10,000 – $8,000).

Regularly Review and Adjust Budgets

Many startups and growing companies face this challenge, and keeping track of your burn rate can make or break your financial future. Simply put, burn rate measures how quickly a company spends its cash reserves before becoming profitable. If it’s too high, you risk running out of money before your business takes off.