What is burn rate?
Definition: A burn rate is a rate at which a company uses its cash to fund its operations. The amount of money a company spends each month relative to its net revenues or sales determines how quickly it will run out of cash.
Understanding and monitoring a business’s burn rate is an important aspect of proper financial management.
Burn rate formula
To calculate a company’s burn rate, simply divide the total amount of money it spent in a given month by its net revenues for that month.
For example, if a business spends $20,000 on operations and earns $40,000 in sales during a certain month, its burn rate is 50%, or 20 divided by 40.
Factors affecting the burn rate
There are several factors that can influence a company’s burn rate. One of the most important is the type of product it offers.
The higher-priced or more complex a product is, the longer its development process will be and the more money it will cost to manufacture and/or market it.
Another factor is the company’s capacity to handle large amounts of cash. Some businesses are better equipped for growth than others, as they have access to greater financial resources or can organize themselves more effectively to manage their funds.
Gross burn rate vs. Net burn rate
The gross burn rate is the amount of money a company spends each month on all its operations and fixed costs, such as payroll and rent.
The net burn rate subtracts any revenue earned during that month from the gross burn rate to provide an estimate of how much cash the business is actually losing.
This figure can give investors and other stakeholders an idea of how quickly the company’s cash reserves will be depleted, thereby revealing possible problems with its long-term financial health.
