Overview

Burn rate is the rate at which a company consumes its cash pool when it generates negative profit. This metric is often used in valuing companies, especially startups which usually experience losses in its early stage. Seed stage investors or venture capitalists often use the burn rate as a determinant for the amount of funding they would provide to the company. There are two types of burn rate:

  1. Gross burn rate looks at how efficiently the company is using its cash on operating expenses. The formula for calculating gross burn rate is: Gross Burn Rate = Cash / Monthly Operating Expenses 
  2. Net burn rate measures the rate at which the company loses money. The formula is as follows: Net Burn Rate = Cash / Monthly Operating Losses
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