Burn rate is the pace at which a company spends cash in a certain period, usually measured monthly. Knowing your burn rate lets you know how long your startup can operate without turning a profit. Not to mention, it’s a metric most potential investors will want to see as they asses whether your venture is worth pouring capital into.
How do you calculate a burn rate?
There are two different kinds of burn rates: Gross and net. A company’s gross burn rate is the total amount it spends on operational expenses monthly, while net burn rate incorporates the business’ revenue into the calculation. Here’s how you figure out both:
Gross Burn Rate = (Monthly Operating Expenses/Available Cash) x 100
Net Burn Rate = (Revenue - Monthly Operating Expenses / Available Cash) x 100
What is good burn rate?
A good rule of thumb is to have a cash runway (the amount of time a business can operate without turning a profit) of 12 months to have the flexibility to weather market downturns, unexpected expenses, etc. So, an ideal burn rate is around one-twelfth of your available cash.
Burn rate example
Let’s say Company A spends $20,000 per month in operational costs, makes $8,000 per month in revenue, and was launched by pulling together $100,000 from savings, friends, and family. That means:
Gross Burn Rate = ($20,000 / $100,000) x 100 = 20%
Net Burn Rate = ($8,000 - $20,000 / $100,000) x 100 = 12%
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