Burnrate, Burn Rate or Cash Burn and Runway are most critical metrics for Startups
Burn Rate refers to the rate at which a company depletes its cash reserves. In other words; the rate at which a company is losing money.
The burn rate is a key metric to assess a company’s health, performance and valuation. However, a start-up is often unable to generate a positive net income in its early stages as it is focused on growing its customer base and improving its product. As such, seed stage investors or venture capitalists often provide funding based on a company’s burn rate.
A higher burn rate would mean that a company is burning through its cash reserves a lot faster, which may indicate a higher chance of entering a state of financial distress.
A company’s gross burn is the total amount of operating costs it incurs in expenses each month. A company’s net burn is the total amount of money a company loses each month.
Net Burn Rate
Net Burn Rate is the total amount of money a company loses per month, using cash reserves. It indicates how much cash a company needs to continue operating for a period of time. However, one factor that needs to be controlled is the variability in revenue. A fall in revenue with no change in costs can lead to a higher burn rate.
Net Burn Rate = Operating Cash Flow / Net Burn Period
Operating Cash Flow a measure of the amount of cash generated by a company’s normal business operations
Net Burn Period is the number of months of which the Burn Rate is based on (e.g. monthly, quarterly or yearly)
Gross Burn Rate
Gross Burn Rate is the total amount of money spent on operation expenses. It is calculated by summing all its operating expenses such as rent, salaries, and other overheads, and is often measured on a monthly basis. It also provides insight into a company’s cost drivers and efficiency, regardless of revenue.
Gross Burn Rate = Cash / Monthly Operating Expenses
Runway is the amount of time – usually expressed in months – a business can continue to operate before it runs out of funds, provided they don’t raise any additional funds.
Startup runway = current cash balance / burn rate
Current cash balance is the amount of money a business has in its bank account at a particular time.