Understanding Burn Rate: Definition and Formula with Examples

Burn rate tells you how long your cash reserves will last. It is a key metric that allows business owners to assess their business's financial health. If you’re looking to raise funds, having a healthy burn rate helps boost investor confidence, allowing your business to secure venture capital and investments with ease.

In this article, we’ll explain what Burn Rate is and how Singapore business owners can calculate the burn rate to better manage the financial health of their business. We will also share actionable solutions that will help you improve your burn rate.

One of the easiest solutions to improve burn rate is to reduce business expenses. We’ll share how Wise Business can help businesses cut down on significant hidden costs like transaction fees and exchange rate markups on international payments. Wise business owners can save on these unnecessary costs and divert them into better use, such as supporting business development and growth.

Table of contents
What is Burn Rate? Types of Burn Rate: Gross vs. Net Burn Rates How to use the Burn Rate Formula What is a Good Burn Rate for Startups? Strategies to Reduce Your Burn Rate How to Calculate Cash Runway Importance of Cash Runway for Startups How Long Should My Cash Runway Be? Tips for Extending Cash Runway

What is Burn Rate?

Burn rate is the rate at which a business is spending its cash reserves. It is usually measured on a monthly basis.¹

Businesses with a high burn rate could risk running out of money. This is particularly important for startups or unprofitable businesses to keep an eye on, to ensure that the business can survive until it starts turning a profit. If you’re running a startup that is relying on venture capital, knowing your burn rate and runway will give you an idea of when you need to start raising additional funding.

On the other hand, businesses with a low burn rate may be under-investing in their future.

Such companies may end up losing their edge in the market or falling behind their competitors. Again, if you’re looking to raise funds, you should note that having a low burn rate could dissuade aggressive investors from funding your startup.

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Types of Burn Rate: Gross vs. Net Burn Rates

Burn rate is generally represented in two ways that give us insights into different aspects of how a business uses its cash reserves.

Gross Burn Rate

Gross burn rate measures the total cash that a business spends every month.

It takes all operating expenses such as payroll, rent, insurance, utilities, marketing costs, etc, into account.

Net Burn Rate

Net burn rate measures the amount of cash your business loses per month.

It is calculated by subtracting revenue and any other cash inflows from Gross Burn Rate.

Key Difference Between Gross and Net Burn Rate (and which should you use)

Gross burn rate gives you a bird’s eye view of your business’s costs, while Net burn rate tells you how much cash your business is losing every month.

You should use Gross burn rate when you’re trying to evaluate fixed costs, but use Net burn rate to understand your business solvency or how long current cash reserves can sustain the business.

How to use the Burn Rate Formula

Burn rate is usually measured in terms of months; hence, to get a clearer idea of your business’s burn rate, you should use a fixed period of 6 months or annually. Using a shorter period could result in higher fluctuations that may not allow you to make effective decisions.

How to Calculate Gross Burn Rate

Gross Burn Rate = Total Cash Outflow / Number of Months²

For example, the fictional Sage Tech Ptd Ltd wants to calculate its gross burn rate over the past 6 months and has recorded total cash outflow (or operating expenses) of 730,283 SGD in the same period.

Their gross burn rate would be:

730,283 SGD / 6 = 121,713.83 SGD

This figure simply means that Sage Tech Ptd Ltd requires 121,713.83 SGD per month to sustain their business on average.

How to Calculate Net Burn Rate

Net Burn Rate = (Monthly Revenue - Cost of Goods Sold) - Gross Burn Rate²

Using the same example, where the fictional Sage Tech Ptd Ltd has a monthly revenue of 98,190 SGD and their cost of goods sold amounts to 30,119 SGD.

Their net burn rate would be:

(98,190 SGD - 30,119 SGD) - 121,713.83 SGD = - 53,642 SGD

After taking Sage Tech’s revenue into account, their Net Burn Rate is 53,542 SGD per month, whereas their Gross Burn Rate is 121,713.83 SGD per month.

What is a Good Burn Rate for Startups?

Unfortunately, there is no one-size-fits-all figure. A good burn rate for your startup or business depends on factors such as your company’s stage, industry, market conditions and growth objectives.

For example, venture capitalist and co-founder of Union Square Ventures, Fred Wilson, shared the following burn rates for software startups based in the US⁴:

• Building Product Stage: below 50k USD per month
• Building Usage Stage: below 100k USD per month
• Building Business Stage: Below 250k USD per month

However, a general rule of thumb is to have sufficient cash reserves to tide your business through three to six months of operations⁵.

If you’re a startup looking to raise capital, you should plan your next fundraising campaign accordingly.

Factors Influencing Burn Rate

Now that you understand about burn rate, it is clear that burn rate is affected by two key factors:

• Operating Expenses, i.e. how much your business spends
• Revenue, i.e. how much your company makes

Here are some actionable strategies that will help you improve your Singapore business’s burn rate.

Strategies to Reduce Your Burn Rate

Optimise Payrolls: While hiring the right talent drives growth, you can opt to delay non-critical hires or consider part-time and contract talent for short-term needs.

Eliminate hidden and unnecessary expenses: Audit your workflows regularly and if you find you have software subscriptions, cloud services and other recurring expenses that may not be mission-critical, it might be wise to evaluate eliminating or renegotiating the payment plans for them.

💡 Foreign transaction fees and conversion fees are common expenses that tend to be charged alongside recurring expenses, especially if your business relies on cloud services that bill in USD or other foreign currencies. Using a multi-currency account business card like Wise Business Card allows you to always enjoy the mid-market exchange rate. Plus, Wise charges transparent, minimal conversion fees, and zero foreign transaction fees, so you always know how much you are paying.

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Optimise for Revenue-generating activities: Another way to improve net burn rate is to increase your business’s revenue. After all, there’s only so much expense you can reduce.

Focus resources on projects that can bring in revenue and allocate spending to essential software that enables your team to grow the business.

Now that you know how to calculate your burn rate, you might be asking how to use it to gauge your business’s survivability.

Here’s where the concept of Cash Runway comes into play.

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How to Calculate Cash Runway

Here’s how you calculate your business’s cash runway:

Cash Runway = Cash Reserve / Net Burn Rate³

In Sage Tech’s case, with cash reserves of 1,000,000 SGD, their cash runway would be:

1,000,000 SGD / 53,542 SGD = 18.7 months

This means, assuming no changes to their revenue and expenses, they would run out of cash to continue running the business in about 18 months

Importance of Cash Runway for Startups

Cash Runway tells you how long your company has before its cash reserves run out.

The longer your cash runway, the more resilient your business will be against market downturns, delayed revenues and unforeseen circumstances in your industry.

It also serves as an indicator of survivability and confidence for potential investors -startups with short runways are usually seen as riskier.

How Long Should My Cash Runway Be?

Your ideal cash runway depends on several factors such as your business model, the stage of your startup, your capital requirements, your growth rate, the industry you’re in and many more.

According to J.P. Morgan, a conservative cash runway of 24 to 36 months is recommended in today’s tighter fundraising environment⁶.

Whereas, according to Scaleup Finance, startups in pre-seed stage should have 18 - 24 months of cash reserves, and those who have been seeded or funded should extend their cash reserves to 24 - 36 months⁷.

External Factors to Consider When Planning Your Cash Runway

On top of the factors that affect your ideal cash runway, you should also keep the following external factors in mind:

• Market condition: Your revenues may be affected in poorer economies, and investors may be less generous with funding when markets are uncertain.
• Fundraising cycle of your industry: Buffer for a longer runway than the average fundraising cycle.
• Competition and industry: Always keep your finger on the pulse of your industry so that your business won’t be swept away by any unexpected threats or shifting trends that could impact your chances of raising funds.

Tips for Extending Cash Runway

Reduce Operating Expenses: Reduce your operating expenses by reviewing operational efficiency, scrutinising recurring expenses and reducing any discretionary spending. Unnecessary spending, such as late payment fees, foreign transaction fees and exchange fees are common expenses that can be easily reduced.

Manage Cash Flows: Startups may find themselves in a tight financial situation when revenue trickles in, but expenses remain consistent. Some ways to improve cash inflows include collecting deposits in advance, having clear payment terms, or even actively checking if your client requires additional payment details to process the payment.

💡For example, on top of helping you save on fees, Wise Business also comes with free features like our invoicing tool that allows you to create and send invoices, add your account details or payment links, making payments simpler and quicker.

Increase Revenue: High revenues increase your cash runway and are the ultimate aim of becoming a sustainable business. Consider upselling to current customers, discovering new customer segments or even price adjustments.

Raise additional funds: Startups can consider raising venture capital, while established local businesses can consider business loans. There are pros and cons to raising funds, which are not in the scope of this article, but you should consider raising funds or getting a loan only if it is within the capability of your business.

🔍 If going the VC or Business loans route is not an option, you might want to consider applying for a business grant in Singapore. Check out our grant resources below:

• Singapore Startup Grants: Full Guide
• SME Funding in Singapore
• Startup SG Founder Grant
• Startup SG Tech Grant

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Conclusion

Knowing your burn rate and cash runway gives you a clear picture of your business’s survivability.

💡A key aspect to managing your burn rate and extending your cash runway is to ruthlessly remove unnecessary spending. If your business frequently transacts with overseas partners and customers, Wise Business can help you operate internationally — without the high fees, hefty admin, and headache of a local bank

• Hold and manage 40+ currencies for all your international transactions
• Pay your SaaS bills and overseas suppliers with the Wise Business card without the hefty foreign transaction fees
• Always get the mid-market rate with zero markup
• Seamless integrations with popular accounting software
• Say goodbye to monthly fees

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Sources:

1. How the Burn Rate is a Key Factor in a Company’s Sustainability | Investopedia
2. Burn Rate | Investopedia
3. How to Calculate Runway | Visible VC
4. Burn Rates: How Much?
5. Cash-Flow Management | American Express
6. Creating a cash runway for your startup | J.P. Morgan
7. Startup Runway Guide | Scaleup Finance

Sources checked on: 11th May 2025