A Guide to Calculating and Managing Monthly Burn Rate

Imagine this – a plane’s picking up speed, the wind is rushing, it’s about to launch itself into the bright blue beyond of the sky. If the runway’s too short the plane will coming to a halting stop, and it would be a waste of land and resources if the runway were too long. 

This is an analogy for a startup runway. A “startup runway” is the number of months a company can operate before it runs out of money, and it’s one of the most important calculations an early-stage startup founder makes. If a start-up founder gets this calculation correct, there success is far more likely!

In other words, think of it as a roadmap to your success through a few quick, easy calculations.

Calculating the Gross Burn Rate

The gross burn rate is the total amount of cash spent each month. For instance, if you begin the year with $200,000 in your bank account and at the end of the year you have $50,000, then that is a gross burn rate of $12,500.

The formula is: 

(Original Cash Balance – Remaining Balance)/12 Months = Gross Burn Rate

Example: 

($200,000 – $50,000)/12 Months = Gross Burn Rate

$150,000/12 Months = Gross Burn Rate

$12,500 = Gross Burn Rate 

Calculating the Net Burn Rate

The net burn rate measures the difference between cash out and cash in – basically, the rate you’re losing money. Profitable companies have a negative net burn rate each year because they bring in more than they spend. 

This is always equal to your net income on the P&L statement and is calculated much the same – add all expenses for the month and subtract all income in hand for each month. This is done monthly because the variability in revenue needs to be taken into account since if you’re making less than the previous month, your burn rate will be greater. 

Calculating the Startup Runway

Calculating your startup runway, or the amount of time before you’re broke, is just as simple. Take your beginning cash balance, for instance, $200,000, and divide that number by your monthly net burn rate.

This number is the number of months before you are completely broke – the end of your runway. Not only does it give you peace of mind to know this number, but forecasting into the future enables you to invest and budget wisely. 

Stagnating cash is just as bad as not having enough. 

Ideal Startup Runway Length

Most startups are wise to prepare for a runway that’s around 18 months long – this gives you 12 to 15 months to target and hit strong goals and milestones and 3 to 6 months to raise more funds. If a startup is under 6 months of runway without hitting those milestones then costs need to be cut right away.  

Making Your Startup Runway Last

Did you know that 90 percent of startups fail? One of the most common reasons startups fail is because they run out of cash – this is when budgeting can help a great deal to keep your burn rate low, as well as outsourcing to lower costs.

Here are a few tips on how to manage your monthly burn rate so that you don’t go in the red.

Examine the Impacts of Spending

Before making a large purchase review how the loss of cash would effect your bottom line, and whether your present revenue would be able to make up for the loss. If the numbers add up and it is a low risk purchase, then there is nothing to worry about! 

If you are hesitant about the purchase and it stretches your budget, delay a month if you can get by without making the purchase to avoid impacting your monthly burn rate. This will keep you from making on the fly decisions and consider the future welfare of your company carefully. 

Plan Around the Next Year

Planning for the future as well as the present will keep your cash flow in check. You can do this by creating predictive models to get a good sense of probabilities. Having a separate expense account for overhead items helps with this! 

How to Budget for Your Startup Runway

A spreadsheet is all you need in order to create an effective budget. Make one tab for expenses and the other for revenue. For each expense that you log, ask yourself how each expense helps your business. 

If you can’t come up with a good reason, then consider eliminating that expense – mark it on the expense sheet – and move on to the next.

After creating this macro budget, create a more micro-budget for each department in your company, which is helpful for growth planning. Because they drive sales marketing and revenue should be your first focus. 

Last but not least, create best-case and worst-case budgets to cover all of your bases. You want to be ready for every possibility, and a worst-case budget acts as a safety net.

Start these budgets while your company is still fine and you’ll have a much easier time with them as your company hopefully begins to grow. Getting in the habit of having these budgets in hand is priceless when it comes to growing your company and preparing for any unpleasant surprises.

To keep yourself motivated, there are many apps and software services available to keep your budget in check. Google Sheets is a great alternative to Excel because your numbers are backed up in the cloud automatically. 

Conclusion

Overall, making your startup runway last is all about using logic over emotion when deciding on what to spend on and when to abstain. The long term health of your company is worth it.

Even though 90 percent of startups fail, don’t let this knowledge discourage you on your own mission of creating a lasting, healthy business. By following the tips in this article you can and will be one of the 10 percent that survives through careful planning, budgeting, analyzing, and always weighing the present with the future.

Want more tips on how to create a healthy, long-lasting business? Ready to move on to the next steps? Check out my website to learn how to launch your startup fast.