Understanding Burn Rate and Cash Runway

Burn rate is a measure of how quickly a business is spending its available cash. It's a critical metric for startups and established businesses alike, especially those that aren't yet profitable or are going through a period of investment and growth.

Monthly Burn Rate

Your monthly burn rate is calculated by subtracting your total monthly income from your total monthly expenses. If your expenses exceed your income, you have a positive burn rate, meaning you're "burning" cash each month. If your income exceeds your expenses, you have a negative burn rate, which means you're generating a cash surplus.

Formula: Monthly Burn Rate = Monthly Expenses - Monthly Income

Cash Runway

Cash runway measures how long your business can continue operating before running out of money, assuming your burn rate remains constant and you don't secure additional funding.

Formula: Cash Runway (months) = Cash on Hand ÷ Monthly Burn Rate

If you're generating a cash surplus (negative burn rate), your cash runway is effectively infinite as you're adding to your cash reserves rather than depleting them.

Why These Metrics Matter

Understanding your burn rate and cash runway helps you:

• Make informed decisions about spending and investment
• Plan for future funding needs
• Set realistic financial goals
• Identify when cost-cutting measures may be necessary
• Communicate effectively with investors about your financial health

Interpreting Your Results

If you have a high burn rate and short runway: Consider reducing non-essential expenses, focusing on revenue-generating activities, or planning for additional funding.

If you have a low burn rate and long runway: You may have more flexibility to invest in growth opportunities, but ensure you're not underinvesting in areas critical for business development.

If you're generating a cash surplus: Congratulations! Consider how to best allocate your growing cash reserves between savings, reinvestment in the business, or distributions to owners.