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How to Calculate Cashflow Burn Rate

Understanding your cashflow burn rate is crucial for startup founders and small business owners. It helps you know how long your business can operate before needing additional funding, and it sheds light on how efficiently you're managing expenses relative to revenue.

The Basics of Burn Rate

Burn rate refers to the rate at which a company spends its cash reserves. There are two primary types:

  • Gross burn rate: Total monthly operating expenses.
  • Net burn rate: Total monthly expenses minus revenue.

These metrics give insight into your company's financial health and how aggressively it's consuming cash.

Simple Burn Rate Calculation

To calculate burn rate, use the formula:

Burn Rate = (Starting Cash - Ending Cash) / Number of Months

Example: If you started the quarter with $120,000 and ended with $60,000 after three months, your burn rate is:

($120,000 - $60,000) / 3 = $20,000 per month

This tells you that you are spending $20,000 more than you're bringing in each month.

Runway can then be calculated as:

Runway = Current Cash / Burn Rate

If you have $60,000 left, your runway is:

$60,000 / $20,000 = 3 months

Importance of Accurate Cash Flow Tracking

While average monthly figures provide a quick snapshot, they can mask underlying volatility. Real-world cash flow doesn't follow perfect monthly averages. Payment schedules, one-time expenses, and timing mismatches between income and expenses can skew the picture.

Dealing with Timing Complexities

Fixed Recurring Payments (e.g., Rent on the 1st)

Many businesses face large payments at predictable intervals. Rent, often due on the 1st of the month, is a classic example. These lump-sum expenses can create short-term cash crunches, even if your monthly revenue covers them in theory.

Strategies:

  • Set aside money weekly to cover large payments.
  • Negotiate alternate payment schedules with vendors.
  • Track upcoming expenses in a weekly cash flow plan.

Frequent Recurring Payments (e.g., Payroll Every Friday)

If you run payroll weekly or biweekly, the number of payroll periods per month can vary. Months with five Fridays result in extra pay periods, temporarily spiking expenses.

Strategies:

  • Adjust your forecast to account for variable pay periods.
  • Monitor cash flow on a weekly basis, not just monthly.
  • Use tools that highlight anomalies like a fifth payroll week.

Tools and Techniques for Better Forecasting

Adopt a simple spreadsheet or cash flow tool to model your finances week by week. This gives a more realistic view of when cash comes in and goes out, helping you avoid surprises.

You can also use our burn rate calculator that allows you to enter daily, weekly, and monthly revenue or expense line items. This gives a clearer picture of how recurring timing impacts your cash position and runway.

Final Thoughts

Burn rate is a powerful metric, but it's only as useful as the accuracy of the inputs. Track your finances with enough granularity to capture real cash flow behavior. Stay conservative, review often, and use burn rate not just as a survival metric, but as a guide to smarter financial decisions.