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Burn Rate

Date created: Oct 12, 2022  •   Last updated: Mar 06, 2024

What is Burn Rate? 

Burn Rate measures the rate, expressed as a percentage, at which money raised through external funding is spent. It is mainly used by start-ups to track the speed of spending over time and estimate the cash needed for operations and growth. It can be calculated either as Gross Burn Rate or Net Burn Rate.

Burn Rate Formula

ƒ Sum(Net Burn in First Time Period
Description: Net Burn, often referred to as Burn Rate, is the amount a company is losing per month as they burn through their cash reserves. It occurs when a company’s operating costs are higher than their revenue. A company that is profitable and generating cash has a "negative Net Burn".
) - Sum(Net Burn in Second Time Period
Description: Net Burn, often referred to as Burn Rate, is the amount a company is losing per month as they burn through their cash reserves. It occurs when a company’s operating costs are higher than their revenue. A company that is profitable and generating cash has a "negative Net Burn".
) / Sum(Net Burn in First Time Period
Description: Net Burn, often referred to as Burn Rate, is the amount a company is losing per month as they burn through their cash reserves. It occurs when a company’s operating costs are higher than their revenue. A company that is profitable and generating cash has a "negative Net Burn".
)
ƒ Sum(Gross Burn in First Time Period
Description: A company's Gross Burn is the total cash spent on operations. These costs typically include all salaries, rent, and other overhead as well as interest and taxes. This metric is often confused with Net Burn, which is a measure of negative cash flow, and includes revenue and expenses.
) - Sum(Gross Burn in Second Time Period
Description: A company's Gross Burn is the total cash spent on operations. These costs typically include all salaries, rent, and other overhead as well as interest and taxes. This metric is often confused with Net Burn, which is a measure of negative cash flow, and includes revenue and expenses.
) / Sum(Gross Burn in First Time Period
Description: A company's Gross Burn is the total cash spent on operations. These costs typically include all salaries, rent, and other overhead as well as interest and taxes. This metric is often confused with Net Burn, which is a measure of negative cash flow, and includes revenue and expenses.
)

How to calculate Burn Rate

In January, a start-up has $200,000 in operating expenses and generates $100,000 in revenue. Next month, the start-up spends $150,000 on operating expenses and generates $100,000 in revenue again. January’s Net Burn is $100,000, February’s Net Burn is $50,000; therefore the Burn Rate in February is ($100,000 - $50,000) / $100,000 = 50%.

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More about Burn Rate

Burn Rate tracks the rate of money spent by a start-up over time. The source of this money is usually funds raised through venture capitals. Burn Rate depicts negative cash flow and must be offset by cash in-flow for a company to be profitable. It can be calculated with either Gross Burn or Net Burn, based on whether you want to understand operating expenditure alone or in relation to revenue.

Start-up founders have an enormous list of things to achieve and very less time to achieve them. Keeping tabs on the Burn Rate is a simple and easy way to take the pulse of your start-up and avoid being the last to know that your business is out of money.

Tracking Burn Rate and Runway at least twice a week is a great way to be informed of the company's financial health and have information handy for the next round of funding. Another useful metric to track alongside Burn Rate is Burn Rate per Employee. Overall, keeping track of Burn Rate can quantify the competency of a founder.

Recommended resources related to Burn Rate

How a balanced Burn Rate Per Employee can influence start-up survival.

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Contributor

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Shane BartlettManagement Consultant

Metrics related to Burn Rate

Net BurnGross BurnOut of Cash Date

Related Tags

Finance
SaaS
Chief Financial Officer
Financial Analyst
Founder