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Calculating Your Company's Burn Rate

Calculating your company's start-up burn rate is fairly straightforward. Your burn rate tells you the amount of cash that you have used up in one month. This is known as negative cash flow. Your burn rate does not include money that you are going to receive, money that has been put into another account, or any outstanding bills. Is some folks like to separate their net burn rate from their gross burn rate. This separation is unnecessary. It only complicates matters. The reason why it complicates things is that the gross burn rate is the amount of money that you have spent in a month. It does not include any incoming cash. The net burn rate takes into account any incoming cash. You subtract the incoming cash from spending. This amount is used to determine your net burn rate. It helps you realize how much cash you need to break even. This way, you won't run out of cash. To keep things simple, it's best to refer to your net burn rate as just your burn rate. You can calculate your burn rate either with investor money or without any venture capital.

Calculating Burn Rate with Investor Money

The best way to calculate your burn rate with investor money is to take the information from your cash flow statement. You will not have to have any adjustments if you're not including any venture capital. Just take the cash amount from the cash balance of the previous month. This will give you the burn rate for a month. You can use a burn rate calculator to do this. Specifically, the burn rate is the net cash amount of money spent each month.

Typically, this figure equals zero or is higher than zero. However, that may be times when the burn rate comes back negative. This means that you are making more money than you are spending. This can happen when you've just gotten new funding. It will appear that you are getting more money. If you have no funding, it can mean that your cash is more than your expenses. In the case where the burn rate is zero, this means you're spending. Keep in mind that the burn rate is a metric that is only relevant for a startup that has more expenses than incoming cash.

Calculating Burn Rate without Funding

Sometimes, a startup may want to know its burn rate without any funding. If relevant, just subtract the funding. Calculating your burn rate without funding is the same calculation as calculating your burn rate with funding. This is a good thing to do when you want to know how many expenses you are recouping. It will also allow you to know how long your company can operate without any further fundraising.

It's easy to calculate your average burn rate. Just repeat the process for as long as you want. Take the monthly burn rate and add them together. Take that amount and just divide them by the number of months. This way you have a burn rate for several months in addition to a burn rate for just one month.

If you're uncomfortable trying to establish your burn rate, you can either hire someone to do this for you or use a burn rate calculator.

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