Loading the player...

What is 'Burn Rate'

Burn rate is normally used to describe the rate at which a new company is spending its venture capital to finance overhead before generating positive cash flow from operations; it is a measure of negative cash flow. Burn rate is usually quoted in terms of cash spent per month. For example, a burn rate of $1 million would mean a company is spending $1 million per month.

BREAKING DOWN 'Burn Rate'

The burn rate is used by startup companies and investors to track the amount of monthly cash that a company spends. A company's burn rate is also used as a measuring stick for its runway, the amount of time the company has before it runs out of money. So, if a company has $1 million in the bank, and it spends $100,000 a month, its burn rate would be $100,000 and its runway would be 10 months, derived as: ($1,000,000) / ($100,000) = 10.

Gross Burn vs. Net Burn

There are two types of burn rates: net burn and gross burn. A company's gross burn is the total amount of operating costs it incurs in expenses each month. A company's net burn is the total amount of money a company loses each month.

So, if a technology startup spends $5,000 monthly on office space, $10,000 on monthly server costs and $15,000 on salaries and wages for its engineers, its gross burn rate would be $30,000. However, if the company was already producing revenue, its net burn would be different. Even if the company operates at a loss, with revenues of $20,000 a month and costs of goods sold (COGS) of $10,000, it would still work to reduce its overall burn. In this scenario, the company's net burn would be $20,000, derived as: $20,000 - $10,000 - $30,000 = $20,000.

This is a very important distinction, because it affects the amount of money a company has in the bank and therefore its financial runway. Even if it's spending $30,000 gross, the actual amount its losing per month is $20,000. This means, for example, that if it had $100,000 in the bank, its runway would be five months rather than around three months. This dictates the way in which the managers outline the company's strategy and the amount that an investor would want to invest in the company.

However, when the burn rate begins to exceed burn forecasts, or revenue fails to meet expectations, the usual recourse is to reduce the burn rate, regardless of money in the bank. This normally means reducing staff.

RELATED TERMS
  1. Slimcoin (Cryptocurrency)

    Slimcoin is a unique peer-to-peer cryptocurrency that allows ...
  2. Gross Margin

    A company's total sales revenue minus its cost of goods sold, ...
  3. Death Valley Curve

    The Death Valley Curve is a phrase that refers to the time from ...
  4. Net Cash

    A company's total cash minus total liabilities when discussing ...
  5. Cash Flow From Operating Activities ...

    Cash Flow From Operating Activities (CFO) is an accounting item ...
  6. Overhead Rate

    Overhead rate is a cost added on to the direct costs of production ...
Related Articles
  1. Investing

    Burn Rate Key Factor In Company's Sustainability

    Be careful around companies with high cash burn rates. These investments can turn to ashes.
  2. Small Business

    Run Your Finances Like A Business

    Think of yourself as your own little company. To make it run smoothly, you need to take a look at your books.
  3. Insights

    Economic Meltdowns: Let Them Burn Or Stamp Them Out?

    Whether the Fed should intervene in market bubbles is up for debate. Learn about both sides here.
  4. Insights

    The Great Inflation of the 1970s

    Political moves meant prevent unemployment served to do the opposite, creating one of the worst fiscal disasters of the century.
  5. Insights

    The Dangers of Flying Business Class

    Think twice about that upgrade. Your cellphone's batteries can get crushed, smolder and burn in business.
  6. Investing

    Tesla Was Auto Industry's Best Short in Sept.: S3

    Tesla was the most profitable short for auto industry bears, says new research from S3 Partners.
  7. Investing

    Why Commodity Mutual Funds Are Burning Investors

    Commodity mutual funds are burning investors.
  8. Investing

    Deutsche Bank Extends Tesla $300M Credit Line (TSLA, SCTY)

    Tesla has entered into an agreement with Deutsche Bank to borrow up to $300 million for its vehicle leasing program.
  9. Managing Wealth

    Jobs With Great Pay, But Huge Stress

    You may want these jobs for the pay and the benefits, but the work can be a killer.
  10. Financial Advisor

    Risk Tolerance Only Tells Half The Story

    Just because you're willing to accept a risk, doesn't mean you always should.
Hot Definitions
  1. Receivables Turnover Ratio

    Receivables turnover ratio is an accounting measure used to quantify a firm's effectiveness in extending credit and in collecting ...
  2. Treasury Yield

    Treasury yield is the return on investment, expressed as a percentage, on the U.S. government's debt obligations.
  3. Return on Assets - ROA

    Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets.
  4. Fibonacci Retracement

    A term used in technical analysis that refers to areas of support (price stops going lower) or resistance (price stops going ...
  5. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
  6. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
Trading Center