UBS

Burn Rate

What is Burn Rate?

The burn rate is a term that describes how quickly a startup company spends its venture capital on overhead before generating positive cash flow from operations. It’s a metric for negative cash flow. The burn rate is usually stated in terms of money spent per month. For example, if a company’s burn rate is $1 million per month, it means that the company spends $1 million per month.

The burn rate is a metric that evaluates how rapidly a corporation spends money. It’s commonly represented in monthly amounts, but it can be expressed in any time frame. The burn rate is an important calculation for new firms because it tells them how much time they have before they have to start making money.

A high burn rate shows that a business’s cash supply is fast depleting. It implies that it is more likely to get into financial difficulties. Given a fixed amount of investment, this could indicate that investors will need to set more aggressive timelines to realize revenue. Alternatively, it may mean that investors would have to put more money into a company to give it a longer time to generate revenue and become profitable.

BURN RATE FORMULA:

GROSS BURN RATE = Cash / Monthly Operating Expenses

NET BURN RATE = Cash / Monthly Operating Losses

The following three areas are likely to be considered when you calculate the Burn Rate of the company:

  • Branding: With so many branches and a varied ROI, branding can often be a point of overspending for new companies.
  • Vendor Relationships: Many young companies set up an early relationship with vendors, even when rates need to be renegotiated or new partnerships sought out.
  • Office Space: Lengthy leases and slower-than-expected staff growth can turn a luxurious workspace into a burn-rate escalation

Also, See: Actual Cost of Work Performed(ACWP)

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