Your company's burn rate captures the amount of capital the business spends in excess of income. This concept is especially important among startups that have raised venture capital funding but that aren't yet profitable; it's a metric that captures a business's health, stability, longevity and runway (amount of time before the business could run out of money).
When you're calculating burn rate, what data should you include in your costs? What happens when the business starts monetizing and revenue begins to grow at a sustainable pace? Here's what to consider in your burn rate forecasts:
Be Brutally Honest About Costs
Each month, add up every cost, big and small, such as employee salaries or paper clips. Examine which costs occur most frequently and how much of a dent they make. It's important to understand your business's pre-revenue life span so that you can effectively manage your money. You can even include an emergency buffer, should an unexpected situation arise.
If you're not sure how to categorize and evaluate your expenses, consider working with an accountant or financial consultant. This expert guidance can help you avoid the unexpected and help provide an objective perspective in your process for calculating burn rate.
Prepare for Multiple Scenarios
You can't predict the unexpected. But you can prepare for multiple scenarios when calculating burn rate forecasts. Come up with a conservative estimate, a best-case estimate and some options for the spectrum in between. Make sure these forecasts account for scenarios like economic shifts and potential competitors.
You never know what the future holds, and a forecast is only as good as the reality that surrounds you. By knowing what might happen in the best and worst cases, you can better prepare your business for the road ahead.
Account for Growth
If you're focused on generating revenue and becoming profitable, there's a fair chance you'll achieve your goals — and potentially more.
When calculating burn rate and accounting for multiple scenarios, envision a time when your company starts generating revenue. This perspective will not only provide an optimistic perspective, but it will also give your team benchmarks to strive for and achieve.
By knowing your company's burn rate, you'll be better positioned to know your business's limitations and scale sustainably. This metric, along with corresponding benchmarks like runway, will help you identify revenue targets that you'll need to hit and the time frame you'll need for initiatives to become profitable.
Remember that your business doesn't exist in a vacuum: Context counts. Prepare forecasts for different scenarios so that you can quickly adapt your plans.
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