Burn rate is how rapidly new company is spending its moolah to finance its operations before actually generating their own moolah. As the name “burn” might suggest, it’s a measure of negative cash flow. But despite how it sounds, it’s a phrase that all startups need to be familiar and comfortable with. When a business is just starting out, it’s spending a lot to get going and not bringing much in. That results in a negative cash flow and therefore a burn rate.
A burn rate is a good thing to keep an eye on because it can let you know when you’ll run out of money before it actually happens. So if you’re spending way too much, the burn rate will let you know to make cuts before it’s too late and the whole company is bankrupt.
It’s also important because it’s one of the things investors look at when trying to decide if your business is worth investing in.
There are 2 kinds of burn rates to know about: net burn and gross burn. Gross burn means the expenses or operating costs you incur each month. Net burn is the total amount of money lost each month. Though burn rates are usually measured in terms of months, they can also be measured in weeks or days as well.
When the burn rate starts to get larger than burn forecasts, or the amount of money you thought you were going to be making simply hasn’t started coming in yet, something has to be done even if there is still currently money to be spent. Usually this means the L word: layoffs.
Our burn rate was so high, we had to get rid of nearly all our on-site miniature horses, which our accountant says was an excessive cost. But damn did we love those horses.