Run rate and one-offs
September's van and annual insurance, named and taken out: the run-rate burn beside the reported one.
By September's own burn, Northwind has 1.4 months. September was a first month: it bought the van outright and paid a year of insurance up front. Neither repeats next month at that size. Take them out, name them, and you have the run rate: what a normal month looks like.
The run-rate figure is negative: a normal month, on September's pattern, would add cash rather than burn it. That's too kind in its own way, because September's supplier bill wasn't fully paid and October will pay the rest. The run rate tells you the shape of a normal month. The 13-week cash flow tells you what the bank will actually do.
Wrong
"We burn (6,552.60) a month." (One-offs quietly removed; no reported figure shown.)
Right
Net burn 24,647.40 (September, as reported) Run-rate net burn (6,552.60), after the van and the insurance
Dropping the one-offs without naming them is the same mistake as leaving them in, pointed the other way. Show both figures and the list between them.
Where this lesson's rules come from
The sources behind this lesson's requirements, by kind. Background reading explains; it is never the authority for a rule. Anything marked as a convention is ours, not the rule-maker's.
- Background reading — not an authority
- Wikipedia, “Burn rate” (opens in a new tab)Burn rate — backgroundFree to read
The words this page teaches
Each links to its glossary definition, which also names the authority behind it and the components that render it.
- Run rateOne period's figure with named one-offs removed, as a measure of what a normal period looks like — run-rate burn, run-rate revenue. Always shown beside the reported figure, with the one-offs listedConvention
- Net burnNet burn is a cash and runway metric, calculated as Gross burn − cash in, excluding financing inflows.
- Capital expenditureCash spent acquiring or improving long-lived assets in the period — the investing outflow free cash flow subtracts
- Prepaid expenseCash paid before the benefit is consumed — an asset until it is. "Prepayment" is the UK and IFRS word for the same asset; a customer paying us early is a customer advance or deposit, a liability
See also
- Burn rate and runway: how to calculate them correctlyGross burn, net burn and months of runway, done the way an investor checks them: from cash, averaged, and with the hires you’ve already committed to.
- Burn rateHow much cash the company uses in a month. Gross burn is all cash going out. Net burn is cash out less cash in. It's a metric, not a GAAP figure.