7 Steps to Calculate Your Average Monthly Burn Rate

7 Steps to Calculate Your Average Monthly Burn Rate

Your business could stop making money today or a client could be very late on paying their invoices. How much would you need every month to stay open and keep paying the bills?

That number is your average monthly burn rate. Knowing this number becomes especially important as your business grows. Payroll gets larger, debt payments increase, inventory changes, and owner compensation becomes part of the financial picture. Your average monthly burn rate gives you a baseline for how much cash your business needs to operate and how much you should keep available in your OPERATIONS bank account.

Here are the seven steps to calculate it:

Step 1: Log Into Your Accounting Software

Start with your accounting software. Your books need to be current enough to give you an accurate picture of the last twelve months. If transactions are missing or expenses have not been properly categorized, your burn rate will only be as accurate as the accounting behind it.

Step 2: Run a Rolling 12-Month Profit and Loss Report

Run your Profit and Loss Statement for the most recent rolling twelve months rather than looking only at the current calendar year.

Using twelve months gives you a much better picture of the normal rhythm of your business because not every month looks the same. You may have annual insurance premiums, seasonal expenses, conferences, extra payroll months, or other costs that only appear once or twice during the year. A full twelve months helps account for those fluctuations.

Step 3: Find Your COGS and Expenses

From your Profit and Loss Statement, write down your Total Cost of Goods Sold (COGS) and Total Expenses.

These two numbers show the expenses flowing through your Profit and Loss Statement during the year. For example, let’s pretend $65,000 in COGS and $182,500 in expenses, giving us total expenses of $247,500 so far.

But we aren't done yet because your Profit and Loss Statement does not tell the entire cash flow story for your business.

Step 4: Run a Rolling 12-Month Balance Sheet

Next, run your Balance Sheet for the same rolling twelve-month period.

This matters because there are financial obligations affecting your cash that may not appear as expenses on your Profit and Loss Statement in the same way. If you only use your P&L to calculate your burn rate, you may leave out money that is still regularly leaving the business.

Step 5: Find the Additional Cash Commitments

From your Balance Sheet and records, write down your Total Short-Term Liability, Total Long-Term Liabilities, Vehicle Loan Payments, Total Inventory, and Owner Draws or Distributions for the period you are analyzing.

In my example, those amounts are $17,500 in short-term liabilities, $26,000 in long-term liabilities, $15,999 in vehicle payments, and $85,000 in owner draws. Which then total $144,499 expenses from the balance sheet. Looking at these numbers alongside COGS and operating expenses creates a much broader picture of how much cash the company is actually using.

Step 6: Calculate Your Total Annual Burn

Now add the totals from Steps 3 and 5 together.

Using the example:

$65,000 COGS + $182,500 Expenses + $17,500 Short-Term Liabilities + $26,000 Long-Term Liabilities + $15,999 Vehicle Payments + $85,000 Owner Draws = $391,999

That $391,999 represents the total amount being used in this calculation for the rolling twelve-month period.

Seeing the annual number can be a little uncomfortable, especially if you have never calculated it before, but this is exactly why knowing your numbers matters. We cannot create a strong cash flow strategy around expenses we aren't willing to look at.

Step 7: Divide Your Annual Burn Rate by 12

The final calculation is simple:

$391,999 ÷ 12 = $32,667

This business has an average monthly burn rate of approximately $32,667.

Now we finally have a number we can use. Instead of saying, "I think we need around $25,000 or $30,000 a month," this owner now knows their operating costs and their burn rate based on the previous twelve months of financial activity.

Use this number when determining how much money you want to maintain in your OPERATIONS bank account. It also gives valuable information when you are budgeting, setting sales goals, making hiring decisions, evaluating pricing, and determining how much cash the business needs before making another large financial commitment.

Final Thoughts from Your Favorite Accountant

Your action step is to log into your accounting software today, run your rolling twelve-month Profit and Loss Statement and Balance Sheet, and calculate your average monthly burn rate using the seven steps above. Write that final monthly number somewhere you will see it regularly because knowing exactly what it costs to operate your business gives you a much stronger foundation for every financial decision that comes next.

Because at the end of the day, positive cash flow isn’t luck, it’s strategy. And it’s my goal to make that strategy as simple as possible for you.

Download my CEO Budgeting Workbook to calculate your average monthly burn rate every single month.