Cash Burn Rate is one of the core financial metrics you have to keep in mind, all the time.
Okay, but what is it?
There are 2 different burn rates:
- Gross Burn Rate: It’s the average amount of money, monthly consumed, to pay for your startup’s activities. In other words, it’s how much money you are spending per month to pay for salaries, rent, energy, marketing, development, services, and other expenses.
- Net Burn Rate: It’s the average monthly negative cash flow. For this metric, you’ll consider not only your expenses, but any revenues that you might have too.
For instance, if you estimate your startup will spend $48,000 in the next 24 months, your Gross Burn Rate is $2,000/per month (total costs divided by number of months).
Still, if you have any current or projected revenue, add it to the calculation and find your Net Burn Rate.
In the above example, if you estimate you’ll earn $500 monthly, then your Net Burn Rate is $1,500/per month ($2,000 – $500).
WHY IS IT A FUNDAMENTAL QUESTION?
Because when you still aren’t generating enough revenue, each and every cent your startup is spending means a lot to its near future.
A founder that is not aware of his startup’s cash burn rate, have no idea if it’s spending too much or too little.
Besides that, by understanding this metric you’ll find great insights about how you’re spending your money.
Mapping all your expenses and identifying the most significant ones, will provide you the information needed to take well based decisions about your cash allocation.
For example, you’ll find a cheaper alternative for a service your startup uses today. Consequently, by reducing this fixed cost, you reduce your cash burn rate.
Your effort to make your startup leaner must be constant, because if you’re spending unnecessary money on costs that don’t add value, you’ll have less money to put on what matters: the learning process.
FINDING THE ANSWER…
The answer is simple, but not necessarily easy to get.
If you have a finance background, I’m sure you will be able to set up a spreadsheet in a couple of hours.
However, if you are not familiar with finance or Excel models, the task might be challenging.
👉 Hey, in order to help you speed up this process, I’ve created “The Early-Stage Cash Planning” Excel model. It is ideal if you still don’t have clients / nor validation. Besides the cash burn rate, it also brings you other cash metrics such as Funding Needs, Cash Runway, Number of Buil-Measure-Learn Cycles, Cash Balance Chart. It is based on The Lean Startup Methodology and incorporates validation and test costs/times estimates to generate your numbers. Check it out:
No matter how you’ll do that, to answer this post’s question you need to know:
- Your current monthly expenses and their forecast;
- Your current monthly revenues and their forecast.
With these numbers, you’ll calculate your Cash Burn Rate and be prepared to my next question: