Cash Burn Rate 

The cash burn rate (also known as the cash runway) assesses how quickly a company (usually for startups) spends or “burns” through money to determine how long a company can operate before money runs out. 

To attain this figure, you will need the total capital and monthly operating expenses as shown in the burn rate formula below. 

• Burn Rate = Total Capital / Monthly Operating Expenses 

For example, if the total capital is £2,000,000 and the monthly operating expense is £100,000, the burn rate would be 20 months (2,000,000 / 100,000). However, there are two other types of burn rates that could give you a deeper insight into the company’s financial stance; they include: 

1. Gross Burn Rate = Total Monthly Operating Expense 

• Your gross burn rate is the total monthly operating costs that the company incurs. 

2. Net Burn Rate = (Monthly Revenue – Cost of Goods Sold) – Gross Burn Rate 

• Your net burn rate refers to how much you lose every month. This number can never exceed the gross burn rate, but it can be less.

To put this into practice, let’s say a FinTech startup’s gross burn rate (monthly operating expense) is £35,000, including £10,000 for monthly workspace, £10,000 on servers, and another £15,000 on employee salaries. And let’s say this startup earned £25,000 in revenue from sales, and the cost of those goods sold tally up to 15,000 per month. 

• Net Burn Rate = (£25,000 – £15,000) – £35,000 = – £25,000

Hence, despite the startup spending £35,000 per month, this calculation shows that it’s losing £25,000 per month. If the startup had £140,000 in the bank, its burn rate would be 5.6 months (140,000 / 25,000) instead of 4 months (140,000 / 35,000). As a rule of thumb, it is generally ideal to have 3 to 6 months’ worth of expenses on hand.