Calculating Your Burn Rate

I try not to spend too much time on definitions — you can usually Google most venture terms and get decent one sentence answers. But I consistently struggle to get a correct answer from entrepreneurs on the subject of burn rate. So it seems worthwhile to break down burn rate in terms of how most venture capitalists ask about the term. Here are some simple guidelines.

1. Burn is a net term, not a gross term. This is the most common mistake entrepreneurs make. The amount you spend each month is your spend, not burn. So if your total payroll and expenses are $50k/month, but your MRR is $40k/month, your burn is $10k/month. Seems simple enough, but more often than not entrepreneurs will report the above set of facts as a $50k/month burn and scare the heck out of investors wrongfully.
2. Your runway is the amount of cash you have in the bank (plus receivables) divided by your monthly burn. Basically, if you keep burning what you’re burning, how long until you run out of money.
3. Burn is a measure of the present gap between revenue and expenses. We know that your burn 6 months ago may be different, and it may narrow if revenues spike, or go up if you choose to invest more heavily. But burn is a measure of the present — what is your burn means what is your gap between revenue this month.
4. Take out any one time items — and just put that in runway. Often a startup will have a one time legal bill around a financing event, or other one time expenses. Those can be deducted from your cash on hand, but don’t affect your burn. Again, burn is about your recurring expenses (or predictably recurring) and its gap to recurring (or predictably recurring revenue).
5. Burn is based off revenues, not cashflow. Some entrepreneurs prepay rent, and include that in their “burn” — your burn is the pro rated monthly share of your rent, whether you prepay it all in the current months or paid it 6 months ago. Some businesses are marketplaces with payment terms different from revenue recognition. Be careful to not just note how much your bank account changes each month, but to think about the recurring expenses to your business versus changes in cash.

All of the above applies only to SaaS businesses, where your MRR is predictable and recurring, as is your spend. If you have a wonkier business, you may need to answer the burn question in more nuance — we spend X every month on payroll, our other expenses look like Y, our revenues come from Z and have a certain amount of variability, etc. Investors want to know the answer to their question, and often the answer is simple. But if you truly have a business where the answer is not straightforward, be honest — let investors work with you to figure out what burn means in your context. Don’t just throw out a total expenses number — that doesn’t tell us anything about your business!