The burn rate is a standard key performance indicator (KPI) that refers to how a company spends its capital. It tracks the monthly expenditures of a company before it starts generating a positive cash flow from its operations.
You can calculate Gross Burn Rate and Net Burn Rate. The Gross Burn Rate focuses on the company's operations, while the Net Burn Rate – preferred in analyzing performance – indicates the rate at which a company is losing money. Considering the monthly variability of the revenue, Net Burn Rate has the following formula: (Starting Balance – Ending Balance) / number of months.
The burn rate is an essential KPI because it can give some insights about the way a company spends its money – a high burn rate can indicate a risk of running out of money, and a low burn rate can mean poor management and a lack of investments in the future of the business.
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