Burn rate is the rate at which a new company uses up its venture or initial costs on operations to keep the business running before generating any inflow. This is used to estimate the negative cash flow of the company.
For instance, a company has $80,000 in the bank and spends $5000 on payroll, $2000 on rent, and $3000 on bills. The total monthly expenses are $10,000. This implies that the company has a burn rate of $10,000 and has 16 months until it runs out of capital. The company is not generating any income.
These are the two types 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
