Dictionary of all accounting terms
Burn rate is used to describe the rate at which a new company spends its initial capital to finance operations before it generating positive cash flow. Burn rate is in essence the amount of cash a company spends per month. If your companyâ€™s burn rate is $10,000, this means your company spends $10,000 per month.
You can use the burn rate to calculate the amount of time your company has before it runs out of money. If you have $100,000 in the bank and your burn rate is $5000, you can operate your business for 20 months (if the expenses donâ€™t increase).
Burn rate comes in 2 categories - "gross burn" and "net burn".
Gross burn does not take into account any revenue - this is usually calculated by a business in its infancy that has not yet made any sales. Gross burn is the total amount of expenses incurred by your business. If your venture spends $1,000 on office space, $200, on utilities, $500 on marketing, and $300 on equipment rental, the total gross burn would be $2,000.
Now letâ€™s assume your company sold a few of its products this month, generating $1,000 in revenue. You are still operating at a loss, but less so than before. The cost of goods sold (COGS) was $200. To calculate your net burn, subtract the COGS - $200, from your total revenue - $1,000, which gives you a total of $800. Subtract your previously calculated â€˜gross burnâ€™ of $2,000 from the $800 which leaves you with $1,200 as your net burn.