What is a Good Cash Burn Rate? Complete Guide [Free Template]

If you are running a startup and are not yet profitable, you must have heard of cash burn (or cash burn rate). Amongst all metrics you should track, cash burn is probably the most important one. Indeed cash burn tells you how much longer you can last before you run out of cash: your runway.

Whilst spending more than the revenues you bring in may be normal for any early stage startup, the cash you lose every month (the “cash burn”) should be enough to support growth, yet not too much so you can last enough until your next fundraising, or profitability.

In this article we will cover everything you should know about cash burn, and we also provide you with a free template at the end of this article. Read on!

What is Cash Burn?

Cash burn is the amount of money you are spending in a given period. Usually cash burn is calculated on a monthly basis. For instance, if you have total expenses of $120k in a month and no revenue, cash burn simply is $120k.

Note: cash burn rate = cash burn (for those who were wondering)

Cash burn can be calculated in 2 ways. The easiest formula simply is to sum up all your expenses and subtract income for a given period (usually, in a month). Otherwise, subtract your current cash balance from the cash balance a month from now.

cash burn rate formula
2 formulas to calculate cash burn

As such, cash burn is a measure of your negative cash flow: the cash flow you ‘lose’ in a given period. Therefore, cash burn can be found in your Cash Flow Statement as the sum of Cash Flow from Operations and Cash Flow from Investment.

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The table below shows how to calculate cash burn using the 2 formulas and the financial statements: your profit-and-loss and cash flow statement.

cash burn calculation

Gross vs. Net Cash Burn

Cash burn usually refers to net cash burn: as explained above, it is the sum of your expenses minus revenues. As such, net cash burn is the total amount of expenses net of revenues.

As you would have guessed it, gross cash burn simply is the sum of your expenses, excluding revenues. Logically, gross cash burn is always equal or superior to net cash burn. Gross cash burn tells you how much cash you are spending in a given period, disregarding the potential revenues you might generate.

Most people use net cash burn instead of gross cash burn as it gives the real picture of your cash flow: hopefully revenues will increase and net cash burn (the delta between your expenses and revenues) reduce over time.

Gross cash burn is a good proxy to track for businesses not yet profitable and with volatile revenues. Let’s assume you have lumpy revenues (you sign large long term B2B contracts for instance) and therefore subject to volatility, therefore net cash burn will be volatile too. Let’s use an example:

Month 1: $200k revenues – $400k expenses

  • $200k net cash burn
  • $400k gross cash burn

Month 2: $80k revenues – $400k expenses

  • $320k net cash burn
  • $400k gross cash burn

As you can see, net cash burn alone isn’t a perfect metric here because it is volatile.

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What is a good cash burn rate?

In order to assess your cash burn, you should look into your runway instead. Runway is a direct function of your cash burn, it is the number of months you can last with the funds you have in the bank today.

Runway = cash balance / cash burn

To calculate runway, simply divide you current bank balance by your cash burn. For instance if you have $2 million in the bank and a $250k net cash burn, runway is 8 months. This means you will be out of funds by 8 months assuming net cash burn remains the same. Logically, the more you spend and/or the lower your revenues, the shorter your runway.

If you aren’t yet profitable, chances are that your investors want you to focus on growth first, which means spending (in tech, marketing or sales for example) thereby increasing your cash burn. Still, you should always be mindful of the runway you have in front of you. Keep in mind that raising equity for your next round, unlike debt, can take several weeks if not months, hence you should be preparing ahead.

In order to understand to the relationship of cash burn and your cash balance, refer to the chart below.

cash burn rate and runway chart
Understanding net cash burn and runway

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If we were at the beginning of month 1, our runway would be 5 months:

Runway (month 0) = cash burn / cash balance = $80k / $500k = 5 months

Yet, because revenues increase at a larger scale vs. expenses, our net cash burn reduces, until we get to profitability.

Instead, if revenues and expenses were the same over the next 12 months, our startup would go bankrupt by the 6th month, as shown below.

cash burn rate chart running out of cash
Illustration of a company running out of cash

Download our free template here to understand how to calculate cash burn, the difference between net and gross cash burn and runway and its impact on your cash balance.

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