Why are we tracking burn—and how do you actually do it correctly?
Most founders track their burn rate because they know they have to, but few use it to truly measure operational efficiency. If you want to actually manage your startup’s survival and growth, you need to look past your bank balance.
In my latest video, “Most Founders Calculate Burn Rate All Wrong,” I break down the right way to analyze your burn rate.
How to calculate burn correctly:
• Focus on Net Burn: This is your Gross Burn (total monthly outflows) minus your revenue. This is the number your investors care about.
• Use your Cash Flow Statement: To get an accurate figure, look specifically at Cash Used in Operating Activities.
• Do not include financing activities in your calculation. A capital injection is not income; your burn should strictly measure how efficiently your business operates.
• Smooth out the Spikes: If your income fluctuates due to annual upfront payments, use a 3-to-6-month rolling average or normalized MRR to see your true financial trend.
The metrics that matter for growth:
• The Runway: How many month of cash burn can you sustain with your current bank balance.
The Burn Multiple: This measures how much you are burning to generate $1 of new Annual Recurring Revenue (ARR).
• The Sustainability Test: Beyond just calculating your runway, you should ask: if you stopped hiring today, would your current growth make you cash positive before you run out of money?
