What Is Burn Rate?
Burn rate refers to the rate at which a company spends its cash reserves or capital to cover its operating expenses, typically expressed on a monthly basis. It is a crucial metric for startups and businesses managing their cash flow.
Key Takeaways
- Definition: The rate at which a company spends its cash.
- Purpose: To measure how quickly a company is depleting its cash reserves.
- Expression: Usually measured in terms of cash spent per month.
Calculation of Burn Rate
- Determine Monthly Expenses: Calculate all operating expenses incurred in a month.
- Subtract Monthly Revenue: If applicable, subtract any monthly revenue from the total expenses.
- Burn Rate Formula: Burn rate = Monthly operating expenses – Monthly revenue (if any).
Importance of Burn Rate
Monitoring the burn rate helps businesses manage their cash flow, make strategic decisions, and plan for future financing needs. It is especially critical for startups to ensure they have sufficient runway before needing additional funding.
