Burn rate

Burn rate refers to the rate at which a company uses up its available cash balance to finance operations before it achieves positive cash flow from the business. It can also be seen as how much money a company loses per month or per year. Burn rate is often used in start-ups and technology companies that do not generate enough revenue to cover their costs.

How it is calculated

Burn rate can be calculated by taking the fall in the cash balance and dividing it by the period. Burn rate is therefore measured as a decrease: a positive burn rate means that the cash balance is falling.

Monthly gross burn rate can also be seen as the monthly operating costs, that is, everything the company pays out during the month. Net burn rate is the same figure once cash received from operations has been deducted:

Net burn rate = Gross burn rate – Cash received from operations

Cash received from operations is what customers actually pay in during the period. The cost of goods and other operating costs are not deducted a second time here — they are already included in the gross burn rate.

Injected capital, for example from a share issue or a loan, is left out. Burn rate is precisely what tells you when the company will need that capital, and counting it in would show a company that has just raised money as having little or no burn while its operations kept draining the bank account.

What is it used for?

Burn rate gives the company and its investors insight into how long the company can continue operating before it has to raise more financing or achieve positive cash flow. It can also help the company forecast how much capital is needed in order to keep operating until it reaches profitability.

Tips for managing burn rate

• Effective cost control: Identify areas where costs can be reduced or optimised in order to extend the operating period.
• Raising capital: Look for new financing opportunities or investors in order to raise the capital needed to keep the business going.
• Focus on growth: Work on increasing revenue and reducing costs in order to approach profitability faster.
• Monitor cash flow closely: Follow the company's financial situation closely in order to avoid surprises and to be able to make the necessary adjustments in time.

Burn rate is an important measure for start-ups and early-stage companies, giving them a clear understanding of their financial health and sustainability. It helps with planning for future capital needs and taking decisive action to secure the success of the business.

A positive burn rate means that the cash balance is falling every month, while a negative burn rate means that the company has positive cash flow and is building up its cash balance. Read more about how the forecasts in Capassa show the expected development in burn rate going forward.