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Financial Metrics

Burn Rate

A critical financial metric that measures how quickly a company is spending its cash reserves, typically expressed as a monthly rate of cash outflow.

What is Burn Rate?

Burn rate is a fundamental financial metric for SaaS companies and startups that measures the rate at which a company consumes its cash reserves to fund operations. It's typically calculated on a monthly basis and serves as a critical indicator of a company's financial health and sustainability.

For SaaS companies, understanding and managing burn rate is essential for maintaining runway, securing funding, and achieving profitability. It directly impacts strategic decisions about growth, hiring, and resource allocation.

Types of Burn Rate

Gross Burn Rate

The total amount of cash a company spends each month, including all operating expenses, salaries, rent, marketing costs, and other expenditures.

Formula: Total Monthly Operating Expenses

Net Burn Rate

The amount of cash a company loses each month after accounting for revenue. This provides a more accurate picture of cash consumption.

Formula: Monthly Expenses - Monthly Revenue

How to Calculate Burn Rate

Monthly Burn Rate Formula

Burn Rate = (Cash at Start of Month - Cash at End of Month)

Example Calculation

• Starting cash: $500,000

• Ending cash: $450,000

• Monthly burn rate: $50,000

Burn Rate and Runway

Burn rate directly determines your company's runway - the amount of time you can operate before running out of cash. This is crucial for planning fundraising and achieving profitability.

Runway Formula

Runway = Cash on Hand ÷ Monthly Burn Rate

Runway Example

Cash on Hand:$600,000
Monthly Burn Rate:$50,000

Runway:12 months

Managing Burn Rate for SaaS Companies

Revenue Optimization

  • • Focus on customer acquisition
  • • Improve conversion rates
  • • Increase average revenue per user
  • • Reduce churn rate

Cost Management

  • • Optimize operational expenses
  • • Negotiate better vendor terms
  • • Automate manual processes
  • • Right-size team and resources

Strategic Planning

  • • Set burn rate targets
  • • Plan fundraising timeline
  • • Monitor key metrics regularly
  • • Scenario planning

SaaS Burn Rate Benchmarks

Healthy Burn Rate Indicators

  • • 12-18 months of runway minimum
  • • Decreasing burn rate over time
  • • Clear path to profitability
  • • Burn rate aligned with growth targets

Warning Signs

  • • Less than 6 months runway
  • • Increasing burn without revenue growth
  • • No clear monetization strategy
  • • Burn rate exceeding industry benchmarks

Related Terms

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