What is a Burnrate?
Burn rate refers to the rate at which a company or organization is spending its cash reserves or available funds over a specific period of time.
It is typically measured in terms of the amount of money that the company is burning through each month. It is often used as a key metric to assess a company’s financial health.
In the context of startups, the burn rate is particularly important because many early-stage companies operate with a negative cash flow. This means they are spending more money than they are generating in revenue.
By calculating their burn rate, startups can estimate how long they can continue operating before they run out of money and can adjust their spending and fundraising strategies accordingly to ensure their long-term sustainability.
How to calculate a Burnrate?
Let’s say a startup has just secured $1 million in seed funding from investors to develop and launch its new mobile app.
The startup plans to use the funds to cover development costs, marketing expenses, and salaries for its small team of employees. After three months of operation, the startup has spent $300,000 on development and marketing expenses and is currently burning through $100,000 per month to cover salaries and other ongoing costs.
In this case, the startup’s burn rate is $100,000 per month.
Based on its current spending levels, the startup would exhaust its available funds in 7 months ($700,000 remaining / $100,000 per month burn rate = 7 months).
This means that the startup has 7 months to either generate revenue or secure additional funding before it runs out of cash.