Burn rate

Financial Term

Technically speaking a company’s burn rate is their net negative cash flow per unit of time, and typically per month is the unit of time.

Equity investors often ask companies seeking investment what their burn rate is. They want to understand both how much longer current cash will last (the “runway”), as well as how much of a financial risk the company will be once they invest.

Entrepreneurs should make sure they answer with the net burn rate rather than the gross expense rate. That gives investors the information they are seeking. While it might also be useful to tell them your gross monthly expenses, if you are generating cash from revenue investors will be focused on how much cash, net, is going off the balance sheet every month.

If you are bootstrapping your business, your personal burn rate can also be relevant. That’s the net amount your available cash is going down every month. Angel investors may be curious about that, to understand both your personal runway as well as the amount of salary you will require to sustain yourself post investment.

Don Gooding

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