Today, I’m excited to introduce you to a serial entrepreneur who has successfully sold several startups to major tech players and is now the co-founder of Pilot, a company providing finance, accounting, and tax services to startups and growing businesses – Waseem Daher.
Pilot is a bookkeeping, CFO, and tax services for startups and small businesses. One team for all your accounting needs.
Read: Understanding Burn Rate: A Financial Tool Every Entrepreneur Should Know
As I explored Pilot’s website, I discovered a valuable tool on their resource page: the Burn Rate Calculator.
It got me thinking—what exactly is a burn rate calculator, why is it important, and why should entrepreneurs care?
First off, if you're interested, Shades of Entrepreneurship podcast listeners get 20% off Pilot Starter or Core for 6 months, valid for the 6 months!
What is a Burn Rate?
The burn rate refers to the speed at which a company uses its startup capital before generating positive cash flow. Simply put, it’s the amount of cash your company spends each month. According to Investopedia, burn rate is typically expressed in terms of how much cash the company is spending per month.
In essence, burn rate represents how much the cash balance in your account has decreased over a month.
According to Pilot, it usually indicates a company’s negative cash flow—excluding outstanding obligations, transfers, or incoming funds. It’s a clear snapshot of your available cash at a specific time.
Burn Rate Calculation
Here’s a simple example:
If your company has $1 million in the bank and spends $100k a month, divide 1,000,000 by 100,000—that gives you 10 months of cash left before you run out. This calculation doesn’t include outstanding balances or other cash accounts; it only considers the cash currently in the bank.
Types of Burn Rate: Gross vs. Net
Pilot explains two kinds of burn rates:
Gross Burn Rate: This is the total cash spent in a single month, not taking incoming revenue into account
Net Burn Rate: This takes incoming revenue into account, so it shows the actual amount of cash lost in a month
To simplify things, Pilot refers to both as "burn rate."
For more details, visit their website and try their burn rate calculator.
Why Burn Rate Matters
If an entrepreneur burns through cash too quickly, they risk running out of funds, potentially halting the business. According to LendingTree and BLS data, about 20% of businesses in the U.S. fail within their first year, and one of the primary reasons is cash flow issues.
A CB Insights report shows that 38% of failed startups cite running out of cash as the main problem. Additionally, a LendingTree survey from May 2021 revealed that 40% of prospective entrepreneurs cited a lack of money as the primary barrier to starting their own business.
A burn rate calculator can help entrepreneurs, regardless of the stage of their business, manage finances effectively by providing insights into how many months they have before running out of cash—this is called runway.
How Burn Rate Can Be Applied
Since burn rate reflects how much cash is left in a given month, entrepreneurs can use this trend to estimate how long their current funds will last. This principle applies to personal finance as well—use a burn rate calculator to figure out your rainy day fund (i.e., emergency savings).
Managing Burn Rate
There are two main ways to reduce burn rate:
Increase revenue: Focus on your core competencies and avoid chasing every idea, which can divert you from your main business goals.
Cut costs: This can involve reducing expenses in marketing, vendor relationships, office space, or staffing.
Unfortunately, cost-cutting measures are happening across the board at both local and national levels, including layoffs, and that's why entrepreneurs need to keep an eye on their burn rate.
Final Thoughts
Burn rate is an essential financial tool for entrepreneurs. It provides a clear picture of your financial health and runway. Understanding your financial state can prepare you for unexpected challenges. As the old GI Joe cartoon used to say, “Knowing is half the battle.”
And if you ever need some help managing your burn rate, don't hesitate to hire a Pilot.
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