If you’re an entrepreneur, then you should be familiar with the concept of burn rate. This is basically a way to measure the overall sustainability of your business. It helps you to determine how long your company can keep things going until your sales start to go up. Often, this term is used for startup companies who are trying to calculate paths to viability.
The reason why the term “burn rate” is used is that it’s about how fast you’re burning your resources. If you’re burning through money without replenishing that money with sales, then you have a very high burn rate. This rate could put your startup company out of business if you don’t get things under control. It’s imperative to try to understand the burn rate so that you can calculate things and make educated decisions.
Why Is Burn Rate Important?
Burn rate is important because it gives you a good idea of when you’re going to run out of money if things don’t change. Also, it’s an important metric when you’re trying to attract investors. If you want people to invest in your company, then you might need to be able to prove that your burn rate isn’t incredibly high and that your company isn’t in danger of collapsing soon. It’s a measurement that you need to pay attention to for sure.
How Do You Calculate Burn Rate?
Calculating the burn rate isn’t all that hard. The easiest way to do this is going to be to focus on quarters when making the measurements. Determine the difference between your starting balance during the quarter and the ending balance. You then need to divide by the number of months to determine how much money you’re burning through monthly.
This will show you how much money you will need to make to keep your company in business. You should use this measurement to inform your decisions. Knowing your burn rate can help with budgeting while giving you a visualization of why you need to improve sales. You should start calculating your burn rate right away so that you can use the information wisely.