Burn Rate

Burn rate, also known as negative cash flow, measures the spending of a company.

Updated: October 30, 2023

Burn rate, also known as negative cash flow, measures the spending of a company. The amount of money a business spends and how quickly they spend it is measured by it. Burn rate is a helpful metric for startups looking to calculate the amount of time it takes to reach profitability. The metric is essential for anyone making financial projections and seeking economic security.

A healthy business, something investors generally look for when researching new companies is indicated by a low burn rate which also indicates that the money of investors will go further and give a higher return on investment (ROI).

Cash flow management software is used by companies to organize the flow of incoming and outgoing funds. Businesses can maintain a positive cash flow and forecast future cash flow based on past transactions and historical or operational data by using this software. Typically, other finance software, including budgeting and forecasting software and invoice management software are accompanied by cash flow management software.

The two types of burn rates are net burn and gross burn. Companies determine how quickly they are using their available cash reserves in relation to their revenue with net burn which is calculated by deducting gross margin from operating expenses. The operating expenses of a company each month without taking revenue into account is measured by gross burn rate. Everything that keeps a business running, like rent, taxes, and payroll are included in operating expenses. The metric is useful for companies that want to track and cut back on spending. Gross burn rate can be calculated by dividing cash with monthly operating expenses.