What is Burn Rate?

Burn rate is a measure of the speed with which a business is spending its cash reserves. The burn rate concept is most commonly applied to startup businesses, which only have a certain amount of time to achieve positive cash flow before their startup capital is drained. This metric is also of great importance to the investors in a startup business, since they will want to know how long it will be before they have to provide additional funding.

How to Calculate Burn Rate

Burn rate is stated as the amount of negative cash flow per month. It is calculated as the total amount of unrestricted cash on hand, divided by the amount of cash being spent per month. The formula is:

Total cash on hand ÷ Cash spending per month = Burn rate

A likely outcome of this calculation is that the firm begins to cut its expenses, thereby reducing its burn rate and extending the amount of time that it can remain in business. Consequently, the calculated amount of burn rate tends to yield a figure that is lower than the actual number of months that a business is able to keep operating. A good way to adjust for this continuing decline in the burn rate is to calculate it based on the net cash outflow in just the immediately preceding month. This approach gives you a better idea of the number of months that your business can remain in operation.

Example of Burn Rate

A business has $1,000,000 of cash on hand and its burn rate is $100,000 per month, so it has 10 months in which to begin generating positive cash flow or to find additional sources of cash.