In Business, what is a Burn Rate?

Tricia Christensen
Tricia Christensen

When you start a new business you usually have a certain amount of cash to get started. Usually this cash helps tide you over before your business becomes a success and you begin to make a profit. A lot of thought must be given to how long your startup funds will last, and what will occur if you run out of funds before you’ve started to sustain the business by making enough money to do so.

Consideration of what it will cost to run a successful business is very important to investors and venture capitalists.
Consideration of what it will cost to run a successful business is very important to investors and venture capitalists.

The rate at which your start-up money gets used is called a burn rate. Essentially, the burn rate is comparable to the use of any type of fuel. How many calories you need to get through a day and how much gas you need to drive someplace else, are also burn rates. They each give an estimate of how long you can do something before refueling. With business, estimating rate at which cash will be consumed helps you to determine when you need to start making money, and when you actually might make a profit.

A burn rate is an estimate that doesn’t account for expensive problems that might occur along the road to establishing a successful business. What if something you’re making gets stalled because of problems with machinery that require extensive and expensive repairs? Each month, most new business owners have to reestimate their rate of cash depletion to see if unforeseen circumstances have created a faster burn rate of startup funds. Projections as to the profitability of a business may also be off. If the product or service you offer isn’t as popular as you hoped, then you may have a faster burn than expected. On the other hand, sometimes a product or service is so immediately popular that your burn rate is slower than expected, leaving you and any investors very happy.

Consideration of what it will cost to run a successful business is very important to investors and venture capitalists. They’ll want to know your projected budgets, chances for success and burn rate. When these aren’t updated frequently, or when estimates of how quickly cash will be used are way off, it can make investors very angry. This means you have to be careful, do your research and be as accurate as you can in your estimations of budget and expenses. If you’re really off, and your business hasn’t become successful, this may deter other investors from giving you more cash to keep the business going.

You also need to use each monthly reassessment of burn rate to make choices about how you continue to run your business. Maybe you need fewer employees, should cut back on business lunches, should observe more electricity saving measures, or a variety of other things that can help reduce expenses. Each month’s assessment of the rate at which your cash is disappearing can help turn the corner if you are committed to making money-saving changes. As your cash diminishes, especially if you’ve stayed on budget, estimation of burn rate also lets you know when it's time to seek other investors, especially if you project profitability in the near future.

Tricia Christensen
Tricia Christensen

Tricia has a Literature degree from Sonoma State University and has been a frequent wiseGEEK contributor for many years. She is especially passionate about reading and writing, although her other interests include medicine, art, film, history, politics, ethics, and religion. Tricia lives in Northern California and is currently working on her first novel.

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