To calculate the burn rate, follow these three steps:
1. Determine Your Starting Capital: Begin by identifying the total amount of money or capital your company has at the beginning of a specific period, typically a month.
2. Calculate Monthly Expenses: Sum up all the monthly expenses your company incurs during that same period. These expenses may include salaries, rent, utilities, marketing costs, and any other operational expenditures.
3. Subtract Monthly Revenue: If your company generates any revenue during the same period, subtract it from the total monthly expenses. This step accounts for the income that offsets your expenses.
The burn rate is then calculated by dividing the net monthly expenses (expenses minus revenue) by the number of months in the period. The formula is:
Burn Rate = (Total Monthly Expenses - Monthly Revenue) / Number of Months
For example, if your company had $50,000 in expenses, $20,000 in revenue, and you're calculating the burn rate for a 3-month period:
Burn Rate = ($50,000 - $20,000) / 3
Burn Rate = $30,000 / 3
Burn Rate = $10,000 per month
So, in this scenario, your company's burn rate is $10,000 per month. This represents the rate at which your available capital is being spent to cover expenses, indicating how long your company can sustain its operations before needing additional funding.