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What is burn rate?

Burn rate is the rate at which a startup uses up its capital. A startup's burn rate is important to track because it can give insights into how quickly the company is using up its funding, how long the company will be able to sustain itself, and whether the company is on a path to profitability.

If a startup has a high burn rate, it means that the company is spending its capital quickly and may not have enough cash to sustain itself in the long run. Conversely, if a startup has a low burn rate, it means that the company is spending its capital slowly and may have a better chance of surviving in the long run.

Burn rate is just one metric that investors use to assess a startup. Other important metrics include revenue, profit, and valuation.

How to calculate the burn rate?


There are a few different ways to calculate burn rate, but the most common way is to take the company's total monthly expenses and divide it by the company's total cash balance. For example, if a startup has $100,000 in the bank and it spends $50,000 per month, then its burn rate is $50,000 per month.

Operating vs financing cash burn rate


Burn rate is typically expressed in terms of cash burn rate, which is the rate at which a company is spending its cash. There are two types of cash burn rate: operating cash burn rate and financing cash burn rate.

Operating cash burn rate is the rate at which a company is spending its cash from operations. A company's operating cash burn rate is a key metric to watch, as it can give investors insight into how quickly the company is using up its cash reserves. If a company's operating cash burn rate is high, it may need to raise additional funds in the future to keep its operations running. This includes cash spent on things like salaries, rent, and other operational expenses.

The financing cash burn rate is the rate at which a company is using up its cash reserves to finance its operations. This can be a concern for investors, as it can indicate that the company is not generating enough cash from its operations to cover its expenses. A high cash burn rate can also be a sign that a company is over-leveraged, which can make it more susceptible to financial difficulties. This includes cash spent on things like issuing new equity or borrowing money.