Burn Rate
The burn rate is the rate at which a new company expends its venture or initial costs on operations before generating any inflow. This is used to calculate the company’s negative cash flow.
For example, suppose a business has $80,000 in the bank and spends $5,000 on payroll, $2000 on rent, and $3000 on bills. The monthly expenses total $10,000. This implies that the company has a $10,000 burn rate and has 16 months before it runs out of capital. The company is not making any money.
The number of sales required to equate fixed and variable expenses to production is calculated using break-even analysis. When starting a new business, developing a new product, or switching to a new business model, break-even analysis is used.
There are two kinds of burn rates:
- Gross burn rate: It is the total monthly operational costs of the company.
- Net burn rate: It is the total money the company is losing each month.
From the above example:
Gross burn = Total operational costs => $5000
Net burn rate = Cash out (Operational costs) – Cash in (Revenue) => $5000
