Burn rate is typically calculated using one of two methods, depending on whether you are assessing gross burn rate or net burn rate:
Gross Burn Rate: This is calculated by simply totaling all the cash expenditures of the business in a given month. It represents the total amount of cash the business is spending without considering any incoming revenue.
Net Burn Rate: To calculate the net burn rate, first determine the gross burn rate (total monthly cash expenditures), and then subtract any income or revenue the business earned in that month. The net burn rate provides a more accurate picture of the cash flow situation by accounting for the company’s revenue generation.
Both calculations give businesses a clear idea of how quickly they are using their cash reserves, helping them plan for future funding needs or profitability targets.