Burn Rate | Definition and Example + 13 Ways to Reduce It
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What is burn rate?
Cash burn rate is the rate at which a company uses up its cash reserves or cash balance.
Essentially, it measures your net-negative cash flow (i.e., your business has more money flowing out than in).
![A graphic with the title "[Cash] Burn Rate" and the definition "The rate your company uses up its cash," accompanied by an illustration of flames.](https://web-cdn.liveplan.com/liveplan/content/uploads/2021/08/27130219/Definition.png?format=auto)
When you’re thinking about cash burn rate, you’re asking:
- How fast are you using up your cash reserves?
- Or is your cash moving in the other direction, and is it building up a healthy balance from positive cash flow?
How to calculate cash burn rate
The cash burn calculation is fairly simple.
Find the difference between the starting and ending cash balances for a selected period, such as a quarter.
Current Burn Rate = Cash Balance in Prior Month – Cash Balance in Current Month
To find your monthly burn rate, divide that total by the number of months in the selected period.
Monthly Burn Rate = (Cash Balance Beginning of Period – Cash Balance End of Period) / # of Months in Period
Now that you know your cash burn rate, you can calculate your cash runway to see how long the current burn rate is sustainable.
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Cash burn rate example
Say a company started last quarter with $20K in the bank but ended with only $11K. You’d calculate your monthly burn rate like this:
($20,000 – $11,000) /3 = $3,000
How to calculate your cash runway
Your cash runway is how long your cash will last at your current cash burn rate. When you’re out of cash runway, you’re out of cash and you’re out of time.
Cash runway calculation
To calculate your cash runway, take the remaining cash in your cash reserves and divide it by the burn rate.
Cash Runway = Total Cash Reserve / Burn Rate
Let’s revisit our burn rate example and see how long we can last at our current rate of spending.
So, our monthly burn rate is $3K, and our total cash reserve is $11K. To figure out how many months we have until we run out of cash, we simply divide:
$11,000/$3,000 = 3.67 months
Since we get a decimal, you would either round up or down depending on when you need to pay your bills. So, we have 3 to 4 months of runway left.
If it’s helpful to see an example of a cash flow statement at this point, you can download our free cash flow example PDF or spreadsheet.
The importance of knowing your burn rate
The cash burn rate is especially important for startups and small businesses in the early stages of growth. More often than not, businesses just starting out aren’t profitable yet, particularly in high-growth technical industries.
It may take a few months to a few years for you to achieve profitability, meaning you’ll need to keep a close eye on your cash and funding to manage expenses.
Now, the burn rate is still important for businesses that have achieved profitability. It’s vital for crisis planning, helping you identify sales and revenue issues, and just staying on top of the health of your cash flow.
In all of these situations, having a handle on your current situation, knowing how you use cash, and being able to make adjustments are all key for driving business growth.
What is a good burn rate?
A good burn rate varies by industry and company stage, typically providing 12-18 months of runway for startups to achieve milestones.
If a business burns cash too quickly, it risks going out of business. Conversely, burning cash too slowly may indicate growth stagnation or insufficient future investment.
Balancing the burn rate is crucial for sustaining operations and effectively pursuing growth. A higher burn rate isn’t always a bad thing unless you didn’t expect it.
How do you reduce your cash burn rate?
If your cash burn rate is higher than you want, the numbers to change are pretty simple. You need to increase incoming cash, decrease outgoing cash, or both.
Here are ideas on how to accomplish those things:
1. Increase your revenue
Look for ways to boost your traffic, get more prospects into your pipeline, increase your conversion or close rates, or raise your pricing. More sales should translate into more cash coming in.
2. Reduce your payroll expenses
For labor-intensive businesses, deferring new hires, laying off nonessential workers, or limiting benefits can lead to big savings. Make sure any cuts are smart and sustainable, though.
3. Reduce your direct costs
For low-margin businesses, finding ways to minimize unnecessary inventory of raw materials and other direct costs can make a big difference in cash flow.
4. Reduce or defer other expenses
Take a close look at your budget. Are there expenses that aren’t contributing to your company’s success?
5. Ditch unprofitable revenue streams
It’s not uncommon for businesses, who are looking to grow, to offer secondary products or services that don’t break even. Put any non-revenue generating offerings on hold to help regulate your Cash Burn Rate. You can always relaunch at a later time.
6. Encourage cash sales
Cash sales are great: you get the money right away instead of waiting for it. Make sure you are offering credit terms selectively and smartly, rather than just converting what would have been immediate transactions into delayed ones.
7. Bill sooner and collect faster
When you do offer credit to customers, be sure to bill them promptly. Clearly state the credit terms and follow up with appropriate collection activities if they don’t pay on time. Adding late-payment charges may also help more timely payments.
8. Pay your bills slowly
Unless there’s a discount or other incentive for paying sooner, don’t pay your bills any faster than you have to. Take advantage of the agreed payment terms to hold onto your cash longer.
9. Sell off excess inventory
Extra inventory is still valuable, but it’s not as useful as having the equivalent amount of cash. Consider offering sales promotions or discounts to sell off what you don’t need for regular sales.
10. Consider using a factoring service
Factoring is a financial service in which a business sells off its bills receivable to a third party at a discounted rate. If you cannot get customers to pay their invoices on time, it may be worth looking into such a service.
11. Hold off on major purchases
If cash is tight, that big capital expenditure may need to wait—unless it’s an investment that will start paying off right away.
12. Consider refinancing debts
Using too much cash to repay debts? Check with your creditors about options to refinance with lower payments.
13. Raise additional funds
If you’ve done all you can to affect your incoming and outgoing cash (your cash flow), but your burn rate is still too high—and, crucially, you are confident that your business can be successful—you may need to do more fundraising.
Get a business loan, seek out investment, crowdfund, etc.
Be sure to do this as early in the process as possible, since a business running low on cash may strike potential lenders as too risky.
Where to find your burn rate in LivePlan
There are a couple of ways to access your burn rate within LivePlan’s Financial Dashboard.
- Once you’ve logged in to your LivePlan account and are looking at the Dashboard, click on the “trends” option in the top navigation.
- Now, hover over the “revenue” heading, and a drop-down menu will appear. Click “Cash burn rate,” and you will be taken to the report page showing your burn rate.
If you need more specific guidance check out our help center articles covering how to access burn rate as well as an overview of the metrics available to you in LivePlan.
Keep an eye on your cash flow
The cash burn rate is a relatively simple formula vital to building and maintaining your business. The better you manage your cash and understand your overall position, the more prepared you’ll be to pursue growth or handle a crisis.
To learn more about the impact of cash flow on your business check out these resources:
- Cash vs. profits: Learn why confusing profitability with cash can lead to dire circumstances for your business.
- How to review your cash flow statement: These are the five things to look for when performing a cash flow analysis.
- Tips for more accurate cash flow forecasts: Get more out of your cash flow projections by following these five recommendations.
- Cash flow statement template: Take your knowledge of cash burn rate and put it to work with this free cash flow forecast template.
FAQ
Is a high or low cash burn rate better?
It’s often best to have a low or even a negative cash burn rate. That means you are building your cash reserves, not using them up. In some cases, investing your cash in growth is a good idea, though: startups, obviously, but also bootstrapped companies trying to grow.
Plan for that cash burn and track your progress. You may be in trouble if you burn through your cash reserves faster than expected.
What’s the difference between gross burn rate and net burn rate?
There are two variations of cash burn rate that you may have seen out in the wild. These really just add complexity to the burn rate term and are more often used by startups—but just so you know what they are:
- Gross burn rate: The total amount of money a company spends each month before accounting for any income.
- Net burn rate: The amount of money a company loses each month after accounting for income. It’s calculated by subtracting monthly revenue from gross burn rate, indicating how much cash reserves are actually decreasing per month.
There’s not much difference between these two terms. “Gross” is used more often if your business is pre-revenue because you are not yet making sales. Meanwhile, “net” is used by anyone bringing in revenue.
In LivePlan, we keep this simple and use the method described throughout the rest of this article, referring to how much cash you use as your “cash burn rate.”
Is burn rate the same as expenses?
No, burn rate is not the same as expenses. Burn rate measures how quickly a business uses its cash reserves, typically expressed monthly, while expenses refer to the total costs incurred by the business.
