What is burn rate?
Burn rate indicates how quickly your company is using or “burning” your start-up capital before it starts generating a positive cash flow. In other words, it’s a measure of how long your business can operate until it has to seek more capital. Burn rate is calculated by comparing your cash balance at the start versus the end of the period and then dividing that difference by the number of months.
You should measure your burn rate carefully as potential lenders and investors will be using it to gauge whether your company will continue to be cash flow positive in the near future. Here are a few helpful tips:
- It’s important to understand what percentage of your burn rate is from fixed costs (i.e. rent and equipment) compared to variable costs (i.e. marketing and freelancers). If the market or your operations take a negative turn, look at how you can cut your variable costs quickly.
- There’s no “right” burn rate as it will vary significantly by industry and other factors. A good benchmark is to make sure you have at least six months-worth of cash available based on your current burn rate.
- Concerned about your start-up’s burn rate? Set up a plan with a personalized Wave Accounting Coach to make sure your bookkeeping is on the right track and to get advice when you need it.