What is burn rate?
It's the rate at which a company is spending its cash balance on running costs. It's a key indicator of company's financial stability; it tracks how much money a start-up company is spending on a monthly basis – its negative cash flow and how much longer it can operate before it runs out of money.
Where have you heard about burn rate?
In chemistry the burn rate is the speed at which a substance uses up limited fuel source. Conversely, a fuel is considered more efficient, and will generate more power, if it burns to release its energy at a faster rate.
What you need to know about burn rate.
There are two types of burn rate. Gross burn measures just the total running costs per month whereas net burn calculates the company's total losses – its revenues minus its running costs.
Most start-ups will not be immediately profitable. The burn rate is useful for calculating a company's runway; the amount of time it has before it runs out of money. For example, if a company has $20,000 start-up capital and a burn rate of $2,000 per month it will have a runway of 10 months to get the business off the ground.
Investors will measure a company's burn rate against its projected future revenues to see if it is a good investment. If the burn rate starts to exceed the forecast or if revenue is not as high as expected they may decide that the investment is too risky.
Find out more about burn rate.
Burn rates are an especially important measure for start-up companies. Find out more about start-ups.