What is burn rate & how does it work?

What is burn rate? Burn rate is the amount of money your business needs in a certain period—usually a month—to cover all expenses. In other words, burn rate tells you how quickly your business “burns through” capital. Typically, burn rate calculates how quickly a company will go through its startup capital before becoming cash flow positive.

What is a startup burn rate?

The burn rate is used by startup companies and investors to track the amount of monthly cash that a company spends before it starts generating its own income. A company’s burn rate is also used as a measuring stick for what is termed its “runway”—the amount of time that the company has before it runs out of money.

What are the different types of burn rates?

There are two kinds of burn rates: gross and net. The gross burn rate is simply the total amount of money spent each month. The net burn rate is the amount of money lost each month and takes into account any possible company revenue.

Why do investors look at a company's burn rate?

Investors also look at a company's burn rate. They'll compare the burn rate to the business plan to see if the business has a realistic chance of becoming profitable. After someone has invested in a company, they may continue calculating the burn rate to track the progress of a company.