Optimizing R&D Finances: Understanding Cash Burn Rate and Leveraging SR&ED

Published on: April 26, 2024

Are you on top of your cash burn rate? Canadian businesses engaged in research and development (R&D) and scientific experimentation know developing new ideas isn’t cheap. Knowing how quickly you spend capital is essential for planning your business strategy and monitoring operational efficiency, as well as being a vital disclosure for potential investors and long-term partners.

So, what should your cash burn rate be? It depends on the business. A general rule of thumb is to make the cash on-hand cover 6-12 months of expenses. This can be even longer in a period of economic instability: Canadian businesses dropped cash spend by as much as 60% in the period between 2022 and 2023.

However, research and development heavy industries face a different situation. As project development and research activities ramp up with the new year, there’s no better time to run the numbers and refine your forecasts for cash burn. Using the Scientific Research and Experimental Development (SR&ED) Program to help fund your R&D efforts is one way to reduce financial pain points.

Below, we’ll take a closer look at cash burn rates and the benefits of the SR&ED program for eligible Canadian businesses. Read on to learn more.

Defining Cash Burn Rate

In the simplest terms, cash burn rate is a measurement of how quickly a business or operation spends (“burns”) its capital reserves.

Understanding your normative, as well as circumstance-specific (e.g. spending more during peak periods of development or when assets need to be replaced) burn rate is crucial to staying on top of your overall financial health. It also helps to know how long of a runway your business has before it needs to generate positive cash flow.

While the cash burn rate is typically calculated monthly, businesses engaged in R&D need to be mindful of how quickly their financial status can change. Depending on the current state of the project, unexpected changes can arise due to complications during experimentation or fluctuations in external capital intake due to changing investor/partner relations. During periods of uncertainty, increased production, and other times of change, you may want to consider evaluating your burn rate weekly or even daily when warranted.

It’s also crucial to be aware that burn rate calculates a quantitative rather than a qualitative amount: $60,000 can last you 12 months if you only spend $5,000 a month, but it can’t guarantee you a profit. Burn rate also does not calculate individual expenses. That means that burn rate does not necessarily speak to the financial longevity of your business as a whole. To have the most comprehensive awareness of your overall financial state, you’ll want to do an in-depth analysis of your burn rate against your business plan to determine if your spending is appropriate for your goals and/or what needs to change.

Why Cash Burn Rate Matters

As any experienced entrepreneur and business owner knows, financial liquidity plays a significant role in determining the long-term sustainability of your operations. No cash = no business, and your liquidity also helps dictate what growth measures are feasible at any given point in time.

If your burn rate shows a relatively comfortable and predictable spending pattern for the foreseeable future, you may be able to look at expanding the scope of your project sooner than anticipated. Conversely, if your burn rate has rapidly accelerated as the result of a particularly difficult quarter or thanks to uncertain market conditions, it’s likely a sign that you’ll need to increase your capital reserves. Before tackling any larger expenditures or accruing more overhead in the form of salaries, etc., you’ll need to buoy up some funds.

Cash burn rate serves as a valuable looking glass into the state of your business and operations. It also helps external investors determine specific funding amounts they are willing to extend when partnering with your team.

Meticulous financial documentation, including routine burn rate assessments, can act as a source of confidence in the maturity of your operations and help to lower your perceived risk profile to investors or others you may wish to partner with financially.

How to Calculate Gross Burn Rate

When assessing your burn rate, there’s a difference between gross and net burn.

Gross burn refers to the total operating expenses in a given period.
“Rent is $2000, plus bills and salaries of $2,000. Our gross burn rate is $4000 this month.”
Net burn is the total amount of money lost during a set time.
“Rent, bills and salaries came to $4,000 this month, and we brought in $3,000 from sales. Our net burn rate is $1000.”

To calculate both burn rates, you’ll need to establish a dedicated timeline (i.e. your average monthly burn rate).

To calculate your gross burn rate, add all operating expenses incurred during your set timeframe and divide it by the period you are measuring – for example, $8000 of expenses divided by 2 months.

To calculate your net burn rate, subtract your operating expenses from your revenue, minus cost of goods sold, during the timeframe selected. Then, divide your resulting amount by the total number of periods within the timeframe, just as you do the gross burn rate. For example, $8000 of expenses, plus $7,000 of revenue, minus $1,000 in costs of goods sold, is a loss of $2000. Divide by the 2 months in the period to get a net burn rate of $1000.

What if My Burn Rate is Too High?

Aggressive burn rates can serve a purpose depending on what stage of development and growth you’re in, but running through your cash flow too rapidly is a recipe for disaster, at least in most cases. Should you find that your cash burn rate is too high to be sustainable, you’ll need to minimize your operating expenditures to regain balance and safeguard your momentum.

How can you lower your cash burn rate? Take aim at overhead costs. Evaluate your overhead, including production processes, staff size, marketing costs and materials used. What do you actually spend? Where can you pare this down?

In many cases, it is advisable to see additional sources of funding like the SR&ED program to help extend your runway and minimize the danger posed by R&D efforts that may require a less conservative burn rate.

The SR&ED program is designed specifically to help fuel Canadian innovation and serves as the government’s largest dedicated source of support for R&D activities. This funding can help businesses extend their runway.

Finance Innovation with Easly Today

If you’re looking to utilize SR&ED refunds, there is one specific aspect to be aware of – SR&ED refunds are only issued after the annual claim is made and can take weeks to months to arrive. For many businesses, this gap between filing and receiving funds puts a strain on your bottom line. Also, you can only claim SR&ED tax credits once per year. If your cash burn rate is relatively high and rapidly depleting your cash reserves, partnering with a Capital-as-a-Service provider like Easly can help.

Our team is proud to work alongside SR&ED-eligible businesses and offer advances on SR&ED tax credits as they accrue throughout the year. This provides capital injections throughout the year rather than waiting for a lump-sum payment from the CRA. Our streamlined process allows us to offer our customers non-dilutive and on-demand funding through a convenient online platform – and helps you offset your cash burn rate with ease.

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