In terms of measuring your business’s financial health, cash burn rate is one of the most important metrics to consider. While this value is helpful for mature businesses managing established cash reserves, it is especially significant for startups with limited capital to cover overhead expenses. Learn more about cash burn rates and how they’re calculated below.
What Is Cash Burn Rate?
Cash burn rate measures the pace at which a business spends money and indicates how much time enterprises have before they need positive cash inflow. In other words, it’s used to gauge how much your company spends in any given period. For instance, a $400,000 monthly burn rate equates to $400,000 spent each month.
While companies typically calculate their cash burn rate every month, this frequency may change depending on the current state of the business and its evolving needs. You might assess your company’s cash burn rate every week or every day during an emergency. Conversely, you may only need to analyze your burn rate quarterly or yearly during periods of financial stability.
When determining your company’s burn rate, it’s important to remember that the resulting amount is quantitative and not qualitative. It will not indicate if this value is acceptable for your company. Burn rate also does not evaluate individual expenses. For a more in-depth view of your company’s financial health, you can measure the burn rate against your business plan to find areas where spending can decrease, and income can improve.
Why Cash Burn Rate Is Important
Since the cash burn rate shows how much money a company spends, it acts as an ideal measurement of sustainability. If the results point towards an unstable financial future, business owners can plan to secure capital beforehand and avoid possible financial issues.
Another benefit of this calculation is that it assists startup businesses in establishing their runway, or how much time they have before their financial resources are exhausted, and profitability becomes paramount. With a better understanding of this timeframe, enterprises can develop sound strategies to manage cash flow effectively and stay afloat.
Furthermore, investors often use this value to determine specific funding amounts they will extend to a startup. They typically compare the business plan with the burn rate to determine the likelihood of financial success. Once an investor extends funding to your organization, they may calculate your cash burn rate periodically to gauge the state of your business. If your burn rate is increasing, they may question why. Measuring your burn rate enables you to proactively detect issues and fix them before investors alter funding.
Calculating Your Cash Burn Rate
Before assessing your burn rate, you need to understand the difference between gross and net burn. Gross burn refers to the total operating expenses in a given period, while net burn is the total amount of money lost during a set time. To calculate both burn rates, start by establishing a specific timeframe. For example, you may analyze monthly burn rates every month for a year.
How to Calculate Gross Burn Rate
To figure out the gross burn rate, add all operating expenses incurred during your set timeframe and divide it by the period you are measuring. For example, you would divide operating expenses by twelve if measuring the monthly burn rate during a year.
How to Calculate Net Burn Rate
To determine the net burn rate, first, subtract your operating expenses from your revenue. The resulting amount represents your total losses during the set timeframe. Next, divide this amount by the number of periods within the timeframe (just as you would to calculate the gross burn rate).
Reducing Burn Rate
If your cash burn rate is too high, you will need to minimize operating expenditures to lower the rate. Many companies decrease these costs by switching to less expensive production processes, condensing staff sizes, and spending less on marketing and technology.
Some businesses struggle to reduce their burn rate even after adjusting their operating budgets. In this case, one of the best options is to seek additional funding. Although many investors apply much weight to a business’s cash burn rate, there are other capital sources that are less dependent on it, such as the Scientific Research and Experimental Development (SR&ED) tax incentive program.
This initiative provides pioneering Canadian enterprises with tax refunds for eligible expenses. Since this program is designed to encourage innovation in Canada, the tax credits are issued regardless of the project’s success. This funding can help businesses lower their cash burn rate and stimulate growth. When a company needs faster access to this type of capital, SR&ED financing can help.
SR&ED refunds are only issued after the annual claim is made. This means that funds aren’t accessible for up to 18 months after expenses begin to add up. That’s why many businesses work with companies like Easly to advance their SR&ED refund to lengthen their runway with non-dilutive capital.
Finance Innovation with Easly Today
If your business needs capital to mitigate an inflated cash burn rate, turn to Easly’s Capital-as-a-Service solution. We provide advances on your SR&ED tax credits as they accrue throughout the year. You can access your SR&ED refund at any time, rather than waiting for payment from the CRA. This streamlined process allows us to offer our customers non-dilutive and on-demand funding through a convenient online platform.
Contact us today to learn more about how our funding solutions can help fuel the growth of your business.