Burn Rate

Why is your Burn Rate important?

Your Burn Rate is important because it’s more than a KPI–it’s a measure of fiscal responsibility.

In the early stages of your startup, you’ll almost certainly be operating on limited funds that will run out at some point in the future. It’s your job, and responsibility to investors, to begin producing revenue before you reach the end of the runway.

At the same time, it’s also vital to optimize the funds you do have. This is where Burn Rate comes in: it lets you know how quickly you’re running through much-needed cash, and if to make changes in your expenditures if needed.

How to calculate Burn Rate

Important! There are two ways to calculate Burn Rate. The first, Gross Burn Rate, is simply:

Gross Burn Rate = Total monthly operating costs

The second, Net Burn Rate, takes into account any revenue the company has accrued during the period. Use the second formula if your company is producing revenue even while still on the runway.

Best practices for Burn Rate

An ideal practice to minimize your Burn Rate is to have between 6 and 12 months of funds on hand. As investors will be paying close attention to your company runway in its early stages, demonstrating fiscal responsibility is of utmost importance at this time.

Thus, if it appears that your Burn Rate is shortening your runway too quickly, you’ll have no other choice but to reduce operational costs to avoid the twin pitfalls of debt and investors potentially pulling funding.

In the end, keeping your operational costs low will allow you to not only minimize your Burn Rate and keep your investors happy, but will also help you focus more on positive growth measures, such as Revenue Growth Rate.

Other KPIs similar to Burn Rate include:

• Operating Cash Flow (OCF)
• Gross Profit Margin
• Working Capital