Burn Rate refers to the pace at which a company uses up its available cash over a certain period, usually measured monthly. It is an important indicator for startups and growth-stage businesses to understand how long their current reserves can sustain operations without additional funding.
Think of it as a step-by-step process:
Note the company’s total cash reserves at the beginning of the period.
Record all operational expenses such as salaries, rent, marketing, and other costs for that time frame.
Add these expenses to calculate the total cash consumed during the chosen period.
Break down the total spending by the number of months (or weeks, if preferred) to understand the pace of usage.
A lower burn rate indicates sustainable spending, while a higher rate may signal the need for fundraising or cost control.
Burn Rate = Cash Spent / Time Period
A general guideline is to keep Burn Rate under 5 percent of total cash reserves per month. However, this varies depending on growth stage, industry, and funding strategy.
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It shows how long a business can survive before it needs to secure new capital, helping founders plan runway and fundraising timelines.
Gross Burn: Total monthly expenses. Net Burn: Expenses minus incoming revenue.
Yes, in some cases. For example, during rapid scaling or expansion, companies may intentionally spend more to capture market share, but it must be backed by a clear growth strategy.
By renegotiating vendor contracts, cutting unnecessary expenses, increasing revenue streams, or improving operational efficiency.