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What is Burn Rate and how to calculate it? - StartUp Terms

"Burn Rate" What is it? Hi I'm Julie Merrill CPA with an expertise in

start-up companies. Today we're going to discuss burn rate. The first time I

heard this term, burn rate, was many years ago back in my DivX days early startup

days and immediately my math brain thought it was a percentage of something,

a rate of something, and that's really not it is what it is at all. It's really

a term that you will become intimately familiar with very soon if you're in a

startup company and it just describes the amount of cash you're

burning in a particular period OR the change in cash. Basically if you look at

your beginning of cash versus your end of cash in a month, it's that difference

that's your burn rate. It's a dollar amount. So burn rate is really the net

change in cash in a given period, and I say given period but I really mean month.

No one's going to ask you for your burn rate for a year, for example. It's

it's measured by month. Even if I'm on your dashboard you summarized it

and it's a you have a quarterly summary. When people refer to your burn rate

they really just want to know your net change in cash for that month. That said

to give you some numbers for an example. If you were to earn two thousand dollars

cash... forget about prepaid forget accrual

accounting, cash! We're talking received cash of two thousand dollars in a month

and you spent ten thousand dollars in that same month cash, okay?

No accruals, nothing, no receivables, prepaids. We're just talking your change

in cash, that net difference between two thousand going in, ten thousand going out

is eight thousand. That would be your monthly burn rate, eight thousand. As a

CEO or entrepreneur you're going to want to become very comfortable and very

familiar with your monthly burn rate, whether it's for that month or is your

average burn rate, because no one in startups, we all know cash is king, you

want your cash to remain as high as possible. And as that till starts going

down, you can project and foresee when you're

getting kind of close to that dangerous zone. So it is something that you want to

include very closely in your management data whether that's your key metrics or

your financial data. Whatever works best for you but it is something you want

constant visibility into your burn rate and that's why it's talked about so much.

So the easiest way I found to keep visibility into your burn rate on a

monthly basis is to include it in part of your financial model. So in addition

to your revenue projections, your cost... especially I like to see it on the

dashboard on the front page that you're looking at for summary is really showing

your beginning cash balance for the period your burn rate and then your

ending cash balance for the period. So in summary, burn rate is simply the dollar

amount your cash changes in a month. It's that simple.

Thank you for tuning in. If you found this video helpful, please like or

subscribe below. This is Julie Merrill, CPA. Ciao for now.