Cracking Tech Jargon is a weekly series that’s aimed at explaining commonly used tech terminologies in a simple and easy to understand language.
What is Burn Rate?
Burn Rate describes how fast a startup is spending its cash reserves to cover for its operating expenses, such as salaries, rents, subscription, marketing and other costs.
It’s essentially the rate of how quickly you burn through finances.
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.
How to Calculate Burn Rate
Where:
- Starting Cash is the venture initial money/capital.
- Ending Capital is the final amount of money.
- Time period is the duration (E.g., monthly or quarterly).
Example
Let’s assume that a startup has $100,000 in cash reserves and it’s monthly expenditure is forecast to be $10,000 on operating expenses, the startup’s burn rate will be $10,000 monthly.
Assuming this startup doesn’t break even or raise any additional funding, it would take 10 calendar months for for the startup cash reserves to go empty.
Why you should always calculate your startup Burn Rate
- Financial Planning
- Cash flow management
- Risk mitigation
- Proper resources allocation
- Budgeting and control
- Investors confidence
