How to calculate burn rate
To keep your projects profitable, it's important to measure burn, a key financial metric for professional services.
In the simplest terms, burn rate is the pace at which you are spending your available capital (or budget). For example, if your project has a budget of $300,000 and a burn rate of $50,000 per month, it will only have a cash runway of six months. To effectively track this, you need to calculate gross burn, which involves understanding the amount of cash your company is spending on operating expenses each month.
Tracking your burn and knowing its direction helps your company make changes to reduce the chance of running out of cash. Monitoring your cash balance and maintaining operational efficiency is critical to ensuring that your company’s cash reserves last as long as possible, especially in early-stage companies where every dollar counts.
How to interpret your burn rate
Rising burn rate & potential setbacks
A higher burn rate can serve as a warning sign that the project may be encountering difficulties. Higher costs can be caused by project scope expansion, resource inefficiency, or unexpected obstacles leading to negative cash flow. If your company's cash reserves are dwindling, it becomes essential to implement burn rate measures to realign expenses with the budget.
Recognizing a high burn rate should prompt project managers to delve into the root causes, reevaluate project priorities, and implement corrective measures to realign expenses with the budget.
Falling burn rate & project progress
Conversely, a declining burn rate can be a positive indicator of project advancement. If the project is spending less than initially forecasted, it suggests efficient utilization of resources and effective cost management. This situation may arise when tasks are completed ahead of schedule or when the team successfully manages resources without exceeding the budget. This improvement in operational efficiency can help preserve your company’s cash balance and extend the months cash runway.
However, it is imperative to ensure that the project's quality and scope remain intact, and that the pursuit of reducing the burn rate does not compromise the overall success of the project.
Burn on track & steady progress
Maintaining a positive cash flow that aligns with projections signifies a well-managed and balanced approach to resource utilization. In addition to this, a project progressing according to plan reflects effective planning, execution, and adaptability to challenges. Meeting milestones and staying within the calculated gross burn rate not only instills confidence in stakeholders but also underscores the project team's ability to navigate complexities while adhering to a sound financial strategy.
Many projects struggle to stay on budget, so if your project fits best in this category, that's a testament to your Project Manager's work and their ability to manage the company's cash reserves effectively.
Our simple burn rate formula:
Projected Effort + Projected Expenses = Projected Burn
Projected Effort:
This includes the total time worked, as captured by timesheet data, plus the value of the remaining resourcing required to complete the project.
Projected Expenses:
Typically, project managers can manage the operating expenses that impact the project’s budget. By selecting which expenses and applicable sales tax are billed to the client, they can ensure that only the necessary costs contribute to the project’s overall burn rate.
What burn reports do I need?
At Projectworks, we recognize the importance of understanding and tracking a project’s burn rate, and we bring it front and center by giving you the flexibility to view your cash burn rate in many forms.
Gross burn rate
From a Project’s Dashboard, you can easily view the project burn for a project overall. This is a valuable figure to include in reporting to upper management.
Monthly burn rate
You can also view a project’s calculated burn rate for the month, ensuring your project managers are keeping their finger on this vital pulse.
Forecasting dashboard
To keep your exec team happy, we’ve included the ability to keep an eye on a project’s monthly burn from the forecasting screen of all projects.
