Burn rate refers to the rate at which a company spends its available cash. Typically used in startup scenarios, burn rate measures how quickly a firm goes through its financial reserves before generating income or becoming profitable.
Businesses monitor two main types of burn rates: gross burn rate and net burn rate. Gross burn rate is the total expenses incurred monthly, while net burn rate calculates total expenses minus any revenue generated within the same period.
A clear understanding of burn rate helps startups anticipate future capital needs, manage budgets effectively, and attract investors. For example, a business with a monthly burn rate of $50,000 and available cash of $500,000 can sustain operations for roughly ten months before additional funding becomes essential.
Keeping your burn rate controlled means balancing growth and expenses; high burn rates can push startups toward insolvency, while low burn rates might limit necessary expansion. Therefore, carefully tracking this metric enables founders and managers to communicate confidently with investors and make informed strategic decisions regarding spending and fundraising requirements.
