how to calculate the burn rate
there are two types of burn rates net burn and gross burn a company s gross burn rate is simply the total amount of operating costs it incurs in expenses each month 1 it s expressed as a company s net burn rate is the total amount of money it loses each month this can t be greater than the gross burn rate but it can be less a technology startup s gross burn rate would be 30 000 if it spends 5 000 monthly on office space 10 000 on monthly server costs and 15 000 on salaries and wages for its engineers its net burn rate would be different however if the company is producing revenue this would be calculated as let s say that the above company with a gross burn rate of 30 000 also has revenues of 20 000 a month from selling goods let s put the costs of those goods to the company at 10 000 a month the company s net burn rate would be 20 000 derived as the actual amount it s losing per month is only 20 000 even if the company is spending 30 000 every month this is an important distinction because it alters the financial runway the company s runway would be five months rather than three months if it had 100 000 in the bank the longer period will affect both how the managers outline the company s strategy and the amount of money that an investor might be willing to put into the company the usual recourse is to reduce the burn rate regardless of how much money is in the bank if the burn rate begins to exceed its forecast or if revenue fails to meet expectations this requires rethinking the startup s cost structure and usually means reducing staff and or other major cost drivers such as office lease technology and marketing 