burn rate
The rate at which a startup or company spends its cash reserves each month before reaching profitability, determining how long the company can operate before needing more funding.
Example
“With $2 million in the bank and a $200,000 monthly burn rate, the startup had 10 months of runway left.”
Memory Tip
BURN rate = how fast you're BURNING through cash. High burn, short runway.
Why It Matters
Understanding burn rate helps you evaluate whether a company you work for or invest in has sufficient runway to survive and grow. For personal finances, it teaches you to track your own monthly spending against savings to determine how long you could sustain yourself without income, which is essential for financial planning and building an emergency fund.
Common Misconception
Many people assume burn rate only matters for startups that are losing money, but established companies also have a burn rate when they spend more than they earn. The term does not necessarily indicate failure; it simply measures cash outflow and is a normal part of business operations for companies in growth phases.
In Practice
A software startup has 2 million dollars in cash reserves and spends 400,000 dollars per month on salaries, servers, and operations. With a monthly burn rate of 400,000 dollars, the company has a runway of 5 months before it runs out of money, meaning it must either reach profitability or secure additional funding before that deadline arrives.
Etymology
From the image of cash being BURNED (consumed rapidly). Common in startup culture since the 1990s.
Common Misspellings
Small business accounting made simple
Related Terms
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See Also
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