Definition
The burn rate is a SaaS financial metric used to measure the money spent by a company every month before it generates sufficient revenue to pay its operational expenses. Simply put, it is the rate at which a company uses its cash reserves while making losses before it starts earning a positive cash flow.
Example
Burn rate is calculated by subtracting the ending balance sheet number from the starting balance sheet number and dividing it by the total number of months.Suppose, a company's starting cash balance is $100,000 in Aug'22 and $40,000 at the end of Oct'22.Starting cash balance = $100,000Ending cash balance = $40,000Monthly burn rate for the 3-month period = ($100,000-$40,000/3) = $20,000
Why it matters
Burn rate helps companies in estimating the amount of money they have left after paying all the bills.Investors may use burn rate as an indicator to gauge business performance and valuation before making an initial investment in the company.A high burn rate means negative cash flow — meaning the company is using up its resources quickly. This can mean trouble, especially while raising additional funding. A low burn rate means that the business plan is efficient and profitable.