Welcome to this week’s installment on key metrics everyone should be monitoring to measure your organization’s financial health! Head over to our Youtube channel, and take a look at these articles from Investopedia, The Balance, and the Corporate Finance Institute to learn more.
What is burn rate? Burn rate is technically the amount of cash that a business or organization is losing each month.
It’s a normal operations term that really stems from a venture capital world, where an organization might be funded with lots of capital up front to let it operate for a certain period of time, like 12 months or 18 months. The burn rate is how much of that money it loses each month in a quest for generating enough revenue to keep stable. If you’re already positive, then you don’t have a burn rate. If you’re already generating revenue and having net profit, then you don’t have a burn rate.
Burn rate is also associated with overhead. We talked last time about Gross Profit and Gross Profit Margin. As long as that’s positive, then your burn rate’s going to be completely associated with overhead, what we call below the line expenditures: salaries, wages, things like that. Burn rate can also include a certain amount of capital expenditures if those are required as a regular part of your business. So a burn rate is completely associated with cash, not so much with just accounting profits. Burn rate can also include debt payments and things of that nature.
You must know your burn rate! You’ve got to know how much runway you have. Once you know your burn rate on a monthly basis or a weekly basis, depending on what business you’re in, then you can calculate how much capital you need to get to the next level. If you’ve got a burn rate and no vision into when you will achieve sustainable revenues, then that’s a real problem. If you know that you’re growing at a certain pace, and your revenue is reducing your burn rate at a regular clip per month, then you can calculate how much capital you need to get to that point.
This is one of the many things Harvard Grace can advise you on. We can help you in assessing burn rate or any of the other business metrics we’ll be talking about here on the site. Please give us a call if you want to chat!