What is Burn Rate & How to Calculate

by

Burn Rate-noun

  1. the rate at which an enterprise spends money, especially venture capital, in excess of income.

Burn rate is the pace a company is losing money. It is usually stated in monthly terms, although it can be measured in weeks or days in a crisis.

Another way to explain this concept is to estimate how fast your company is consuming (or burning) it’s financing to support operations above cash flow. It’s a measure of negative cash flow.

Why Does Burn Rate Matter?

Once you break it down, two primary reasons make calculating your burn rate necessary.

The first reason, it tells you when you’re going to run out of money. Pretty important information in running a business

The second is a little more complicated than the first. Investors look at a company’s burn rate then measure it against the future revenues of the company. The answer is the main deciding factor if the company is a worthwhile investment. A company whose rate is higher than forecasted sales or if the company’s revenues are not growing as rapidly as expected, chances are any investors will think the company is a risky investment.

How to Calculate

  1. Start with a specific time, such as a quarter.
  2. Find the difference in your cash balance at the beginning of the quarter and the end of the quarter? If you started with $25,000 “in the bank,” and at the end of the quarter, you have $15,000, you burned $10,000.
  3. Divide by the number of months in the period you selected. Since there are three months in a quarter, your company burned $30,000 a quarter. For example; Your company needs $5000 every month to keep the lights on, but sales are only $2500 for the same period. Therefore, your burn rate is $2500 a month.

In conclusion, a company with a healthy burn rate will find new investors more easily.

Get Your 30-day Trial!

No credit card needed

Additional Articles

0 Comments
Submit a Comment

Your email address will not be published. Required fields are marked *

Pin It on Pinterest

Share This