Burn Rate: How Long is Your Business “Runway”?
Imagine your business bank account is a water tank. To keep your business running, water has to flow out of that tank every month to cover costs like rent, software, and your team.
Burn Rate is simply the rate at which water is leaving the tank.
1. Gross Burn (The Total Outflow)
Think of this as the main faucet. This is the total amount you spend each month to keep the doors open, regardless of whether you make a sale.
- The Simple Formula: Total Monthly Spending = Your Gross Burn
2. Net Burn (The Real Story)
Now, imagine you have a hose at the top of the tank adding some water back in (your sales/revenue).
- If you spend $5,000 a month but bring in $2,000, you are still losing $3,000 overall.
- That $3,000 is your Net Burn. It’s the actual amount your “water level” drops every month.
- The Simple Formula: Total Monthly Spending−Total Monthly Income
Why This Matters to You (The “Runway”)
The most important reason to know your burn rate is to calculate your Runway. This is simply how many months you have left before the tank is empty.
If you have $30,000 in the bank and your Net Burn is $3,000, you have 10 months of “Runway” left.
Why is this useful for a Small Business or Startup?
- Peace of Mind: Instead of worrying, “Do I have enough?”, you have a clear date on the calendar. It turns fear into a plan.
- Better Hiring Decisions: Before you hire a new assistant, you can see exactly how much that will “speed up” your burn rate and if you’re okay with a shorter runway.
- Timing Your Growth: If you see your runway getting shorter, it’s a gentle nudge to either increase your sales (add more water) or trim your expenses (tighten the faucet).
- Knowing When to Ask for Help: For startups, this tells you exactly when you need to look for a loan or an investor—long before the tank actually runs dry.
