The Burn rate describes how quickly a start-up uses up its available funds. It is usually expressed as a monthly figure and shows how much capital a company needs for its day-to-day operations whilst outgoings exceed incoming payments.
This key figure is particularly important for start-ups. This is because it helps founders to monitor their cash flow, identify financial risks and prepare for future funding rounds in good time.
What types of burn rate are there?
When carrying out the calculation, a distinction is made between two key figures:
- High burn rate: Refers to a company’s total monthly outgoings, such as those for staff, rent, software and marketing.
- Net burn rate: Shows the actual monthly drawdown on capital after taking into account operating cash inflows.
Whilst the gross burn illustrates the level of expenditure, the net burn shows how quickly the available funds are actually dwindling.
Net capital consumption is therefore the key factor in calculating the remaining financial scope.
How is the burn rate calculated?
The calculation is based on a company’s actual cash flows.
Net burn rate = Monthly operating outflows − Monthly operating inflows
Example from a B2B start-up
A start-up is developing software to optimise industrial production processes. The following cash flows arise each month:
| Position | Amount |
|---|---|
| Staff | 25.000 € |
| Software and infrastructure | 5.000 € |
| Marketing and Sales | 10.000 € |
| Total payouts (gross burn) | 40.000 € |
| Payments received from customer contracts | 15.000 € |
| Net Burn | 25.000 € |
The company therefore spends 25,000 euros more each month than it takes in from its business activities.
It is important to take actual receipts and payments into account. This is because posted turnover does not always correspond to customer payments that have already been received.
How is the burn rate related to the runway?
The Runway describes how many months a start-up is expected to be able to continue operating with its existing cash reserves.
The following simplified formula can be used for this:
Runway = Available cash and cash equivalents ÷ Monthly net burn
If the start-up from the previous example has 200,000 euros and spends 25,000 euros net per month, this gives:
€200,000 ÷ €25,000 = 8 months
Assuming that cash flows remain constant, the calculated coverage period is eight months.
However, additional investment, fluctuating turnover or delayed payments may affect this timeframe.
You can find more detailed information in the innoWerft article on Start-ups’ runway and financial planning.
Why is capital expenditure important for start-ups?
Particularly in the early stages of a business, revenue is often not yet sufficient to cover all ongoing expenditure.
Regular analysis therefore helps to:
- Identifying liquidity risks at an early stage
- To assess the remaining scope for financing
- To review cost structures and investments
- Preparing funding rounds in good time
- Making growth-related decisions based on up-to-date financial data
- To present the financial performance to investors in a way that is easy to understand
A high rate of capital expenditure is not necessarily a bad thing. For example, targeted investment in product development, staff or market expansion can be a sensible move.
The key factor is whether the start-up is making sufficient progress with the funds invested and ensuring its solvency.
How can start-ups optimise their burn rate?
To manage their use of capital more effectively, start-up founders should analyse their incoming and outgoing payments on a regular basis.
The following measures may help:
- Prioritising costs: Assess expenditure according to its contribution to the company’s development.
- Planning for liquidity: Compare expected and actual payments on a regular basis.
- Strengthening recurring revenue: Attracting new customers and strengthening existing customer relationships.
- Co-ordinating investments: Match larger expenditure items against the available funding.
- Developing scenarios: Calculate the impact of different trends in turnover and costs.
- Identifying funding needs at an early stage: Prepare new rounds of funding well in advance.
The aim here is not to minimise all costs. Rather, start-ups should target their capital towards areas where it will provide the greatest support for the company’s development.
How can innoWerft help with this?
innoWerft helps founders to assess the economic viability of their business models, refine their financial planning and prepare for key funding decisions. Through coaching and its network of investors, start-ups can better assess their capital requirements and develop suitable growth strategies.
Frequently Asked Questions about Burn Rate
What does ‘burn rate’ mean in German?
The term essentially means ‘rate of capital consumption’. It describes how quickly a company uses up its available cash.
What is the difference between a burn rate and a cash burn rate?
Both terms are largely used interchangeably in the start-up context. They describe the rate at which capital is being used up over a specific period, usually on a monthly basis.
What is a good burn rate?
There is no universally applicable ideal figure. The appropriate amount depends on the stage the business is at, its business model, its growth potential and the financial resources available.
Is a high burn rate always a bad thing?
No. High capital expenditure can result from sensible growth investments. It is important, however, that the start-up is able to finance its expenditure and that the investments lead to demonstrable progress.
innoWerft is an early-stage investor and accelerator based in Walldorf, supporting start-ups before or shortly after they are founded by providing capital, coaching and access to a network of investors and businesses to foster sustainable growth.
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