Burn Rate Calculator

How to use your Burn Rate Calculator

Your Burn Rate Calculator helps you work out the date when your business will likely run out of cash – otherwise known as its cash-zero date. This is critical information that lets you know how long your business can feasibly continue until it requires more funding.

Step One – Enter your cash and capital reserves amount

The burn rate calculator* will provide early awareness of your business’s cash situation. You can then plan to make changes to your business model if necessary.

You’ll also have a clearer idea about whether you can afford to:

• Expand
• Hire another staff member
• Introduce a new product line

Enter your cash and capital reserves figure. This is the money (or safety net) you’ve set aside to ensure your business has adequate funding during lean times.

Step Two – Enter your total monthly costs

Input your business’s total monthly costs. These costs might consist of:

• Rent – at $6,000 per month
• Electricity – costing $800 each month
• Wages – at $2,500 a month for one employee

In this instance, your total monthly costs would come to $9,300, so you would enter this figure in your Burn Rate Calculator.

Step Three – Enter your average monthly sales

Enter your business’s average monthly sales – and be sure to include all the funds you expect to deposit into your business bank account.

For example, if you owned a bicycle store, your average monthly sales could be made up of:

• Bike sales – $30,000 per month
• Accessories – $6,000 on average each month
• Bike repairs and maintenance – $4,000 a month

In this instance, your average monthly sales would total $40,000, so you would enter this figure.

After you enter these three figures, you’ll be given a cash-zero date. You’ll be able to pay your costs until that date at your current levels of sales and expenses. After this date, you’ll need additional funding.

Step Four – Evaluate your cash-zero date

Look at your cash-zero date and, now that you know your business’s starting point for negative cash flow, you have time to create an action plan to avoid it.

Your cash-zero date varies according to your sales and expenses, which is why it’s important to continually check your cash flow. The sooner you’re aware of it, the more time you’ll have to plan and act.

Step Five – Look for improvements

Can you find ways to push your cash-zero date back* or ideally not need one at all? To improve your situation, you’d have to either reduce your monthly expenses or increase your average monthly sales.

You could lower your monthly expenses by:

• Reducing your direct costs. Can you renegotiate any supplier deals or find better offers at discounted rates?
• Shutting down unprofitable revenue streams. You may be able to let go of a certain revenue channel that’s failing to make a profit, helping you cut your expenses.
• Reprioritizing your expenses. This means putting on hold any costs that aren’t of major importance to your business. For instance, you might be able to work longer hours over this time period, allowing you to let go of a part-time staff member.

Alternatively, you could aim to raise your revenue levels by:

• Upselling and cross-selling. You may be able to use some upselling and cross-selling skills to encourage your customers to purchase more from your business.
• Altering your payment terms to either get paid in cash when your goods or services are purchased, or to get your clients to pay their bills sooner than they currently do.

All in all, your cash-zero date isn’t something to fear. Rather, it’s a vital metric to help you plan ahead so you don’t actually have to face that date.

*These resources are guides only and should neither replace competent advice, nor be taken or relied upon as financial or professional advice.