What is Burn Rate?
Burn rate is defined as the rate at which an enterprise, company, or startup spends its money, especially investment capital. There are two important variables that influence startups' burn rate, including the total cost of growth (operational expenses) and net revenue.
How to Calculate Burn Rate
To calculate burn rate and runway, follow this simple formula: burn rate = (starting balance - final balance) / # months.
Importance of Burn Rate
A high burn rate may signal some flags for the board of directors. In some cases, it may take years for a startup to become profitable. In this scenario, the board of directors may seek venture-backed investments to fuel growth. An aggressive burn rate may indicate to investors that the company is spending too liberally. Meanwhile, a slow burn rate might tell investors that the company is too conservative with its investments. An effective board must closely analyze cash coming in versus cash coming out to better predict its financial runway. According to recent studies
, 82% of small businesses fail within the first few years due to poor cash flow management.
What is a Good Burn Rate?
Most entrepreneurs and investors recommend having at least twelve months of runway. Depending on the maturity (and scalability) of the startup, some organizations may require more or less available cash on hand.
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