We can almost hear people thinking as we throw the term around. “What is a burn rate?” they seem to be asking themselves. Usually, though, no queries arise from that doubt. So, when odd faces begin to show, it might be best to clarify. Don’t just stand anywhere wondering what a burn rate is. Discover all there is to know about burn rates with this quick read we bring for you right here.
First, we’ll describe what burn rate is, then we will cover how to calculate a burn rate and why a burn rate matters. Lastly, we’ll discuss how to reduce a business burn rate, as well.
What is burn rate?
Know how we can get to where we spend money as if we were burning through it? This burn rate is not a scientific or backed-up fact, but that’s possibly from where the term “burn rate” comes.
In real corporate life, though, the burn rate usually has to do with how much cash a business spends in a month. Yet, it’s also tied to how much VC (venture capitalist) funds a startup uses up on overhead before getting any positive cash flow. In a way, we can speak of burn rate to describe negative cash flows during what’s hopefully a startup’s initial stages.
Because of the above, burn rates help determine how much time we’ve got on our starting business before running out of whatever funds we have. It refers mainly to those funds aimed at getting a new business up and running. If we burn through $100K per month and have $500K in funding, then we can kind of expect our company to be able to operate for at least five months - in books and theory.
Of course, there are ways to cut back on expenses, and we’ll look into that in a minute, as well. But that’s in general what we mean when we speak of a burn rate at this point. How to calculate it, though? That’s a bit more complicated, and we’ll go straight into it, then.
How to calculate the burn rate
First, we need to speak of gross and net burn rates. They differ.
For the gross one, we’d need to take fixed and variable expenses per month. Then, sum those up to get the monthly gross burn rate.
For the net one, we’d need to look at revenue and subtract business expenses. We also do this per month.
Note we’re stating monthly timeframes here, but it can easily be the case that you need to come up with yearly, weekly, and even daily burn rates at any point.
We don’t expect this to be so clear as is (nor as applicable or isolated) without giving you time-saving and excellent financial tools. That’s why we’re making our models available and even teaching you how to create your own.
Help yourself with financial templates.
For us, our financial model template has been critical to estimate our company’s potential. Of course, it’s tied to much larger items than just a gross or net burn rate. Yet, that’s positive as it considers how much to charge for a product. Or how much we’ll pay for client acquisitions, the time needed to develop a product, and how we’ll cover our staffing needs in the process, for example. There’s a lot more to it, of course!
In the end, this aspect of a business is all about knowing how much cash we have to execute and get results. The model we present here made Slidebean profitable. And we’re making it available as a free download. Our CEO is even here to teach you how it works over a quick video tutorial. So don’t miss out on such valuable business help, if you can!
Why does the burn rate matter?
But then, why should anyone care about a burn rate? Well, see. If you have a high burn rate, that means you’re going through your funding faster than possibly expected. So, it’s a safe indicator of much-needed re-shaping.
We mean, re-setting matters either because we’ll need to get more cash to keep up with the current pace. Or we might need to be more aggressive with what we’re doing to do more in less time, meaning we’ll need to move timelines around a bit.
And it can even just be tied to knowing that we’re about to face a bit of stress financially speaking. Burn rates help us envision all of that. And calculating one early can guide us significantly through these waters.
As Caya puts it when he describes how we spent our first $250,000, “Balancing burn rate and runway in a startup is probably one of the most critical tasks a CEO must deal with.” Therefore, let’s see how companies can cut back on any given burn rate now.
How to reduce your burn rate
We can take a few steps to cut back on a burn rate and extend what’s known as a company’s “runway” to profitability. For that, we can either get more cash or simply limit how much is going out.
For the first option, we should look for ways to increase revenue. And that can be done through more traffic, pricing adjustments, even getting more funding.
We’d need to cut back on staffing or push new hires further down a timeline for the second option. Cutting back on employee benefits and other non-essentials is also an option. And there are more.
Even consider your rental expenses and what’s going into office supplies. You can even decipher how much every single person in the company costs the business. Think so about travel, indeterminate rent, office space, insurance, and any other perks. Then, multiply that by the number of people working with you. Doing so should give you a hint if you can do anything to cut back on expenses healthily. Maybe some can just be pushed further down the line whenever revenue is already coming in steadily, for example.
Other intelligent and innovative ways you come up with to cut back on your burn rate can be valid. So don’t be afraid of those new ideas you can conceive to reduce costs.
Selling equity is another option here. And though it might not be the best for many reasons, it can certainly be something you bring to a financial table with investors and other stakeholders.
So, feel free to look into that for a total read of 12 minutes if you’re up for learning more.
We also recommend using software management tools to cut back on unnecessary expenses. Examples include doubled or expired licenses, delinquent fees, duplicate or orphaned tools, and more! For that, we certainly recommend Recurring. Yet, as usual, just let us know how we can help if we can ever lend you a helping hand.