How do you calculate Burn Rate (BR) for SaaS companies?

Burn Rate: Definition, Formula, and Calculation for SaaS Companies

Burn Rate (BR) is the rate at which a company spends its cash reserves over a given time period. It is a critical metric for SaaS (Software as a Service) companies, revealing how quickly a business is drawing down its available capital and how long its current funding will last before it needs to reach profitability or raise additional investment.

To calculate Burn Rate for a SaaS company, you will need to know the following:

Net cash burn: This is the net amount of cash that the company is spending in a given time period (e.g. month, quarter, year). Net cash burn is calculated by subtracting the company's cash inflows (e.g. revenue, investment proceeds) from its cash outflows (e.g. operating expenses, payroll, infrastructure costs). The result is the net amount of cash consumed during the period.
Time period: This is the length of time over which the net cash burn is being measured (e.g. month, quarter, year).

Once you have these numbers, you can use the following formula to calculate Burn Rate:

Burn Rate = Net cash burn / Time period

For example, if a SaaS company has net cash burn of $100,000 in a month, their Burn Rate would be:

Burn Rate = $100,000 / 1 month = $100,000/month

is means that the company is spending $100,000 per month.

Gross Burn Rate vs. Net Burn Rate

There are two types of burn rate SaaS companies should track:

Gross Burn Rate: The total cash spent each month, before accounting for any revenue. Formula: Gross Burn Rate = Total monthly cash outflows.
Net Burn Rate: The net cash lost each month after subtracting revenue from total outflows. Formula: Net Burn Rate = Total monthly cash outflows − Monthly revenue.

As revenue grows, net burn rate decreases and eventually reaches zero at cash-flow break-even.

Calculating Runway

Burn Rate is commonly used to calculate a company's runway — the number of months of cash remaining before funds run out:

Runway (months) = Cash balance ÷ Monthly Burn Rate

For example, a company with $1,000,000 in the bank and a net burn rate of $100,000/month has a runway of 10 months.

It's important to note that Burn Rate can vary significantly depending on the stage of the company's growth and the industry in which it operates. A high Burn Rate may be acceptable for a company in the early stages of growth, as it may be investing heavily in marketing and product development to drive growth. However, a sustained high Burn Rate may be a cause for concern for a mature company, as it may indicate that the company is struggling to generate sufficient cash inflows to cover its expenses.

For more guidance on SaaS financial metrics and business performance optimisation, If you have any other questions visit us at Arise GTM

How do you calculate Burn Rate (BR) for SaaS companies?

BR helps SaaS companies understand how quickly they are using up their financial resources.