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| Understanding What Burn Rate Is: Benefits & How to Calculate It |
Burn Rate is related to the survival of a company. It is hoped that the company can manage it well so that it can grow.
Burn Rate is very important to know how much time you have to manage investor funds to make a profit before your business does not run well or even goes bankrupt. In startups or pioneering companies, burn rate is something that will help the company avoid bankruptcy.
Of course, to start a business, we need to analyze and make calculations carefully and accurately.
What is Burn Rate?
Burn Rate is a calculation used to estimate the budget costs taken from investor capital that will be used by a new company or startup. Usually this cost will be used by the company, especially before getting positive cash flow from its operations.
The term burn rate is often used as the level of money burned before the startup makes a profit. This term can also be interpreted as a calculation that measures negative cash flow.
By knowing the burn rate of a startup company, the fund owner or investor can also calculate the time the company has before running out of money. Investopedia says that within that time period, a business must be able to make a profit so that it does not go bankrupt.
It is natural for a startup company to experience financial difficulties and also have difficulty making a profit in the months when the business is running. Because usually the focus of the business is only on developing the business itself and also improving the quality of the products being marketed.
Therefore, the burn rate is important in a startup company so that investors who have the funds are willing and able to provide funding with an amount that has been calculated carefully.
You can consult with a financial planner for free to manage the expenses of the company that is being run so that expenses do not increase and the company does not experience losses.
Benefits of Burn Rate
By knowing the burn rate value of a company, the company can get the feasibility of a business, predict changes in company capital, estimate the time to develop, and also control expenses.
1. Assessing Feasibility in a Business
A business can be called feasibility not only seen from its productivity but also from the total costs incurred.
In this case, the burn rate is one of the costs that can be used as a benchmark for investors to assess the feasibility of a business by calculating the time the start-up company has before the funds provided run out.
2. Predicting Changes in Company Capital
One of the indicators or supporters of a business and company to survive is capital. By knowing the changes in company capital and capital turnover, company management can calculate the amount of capital that has been issued. And predict changes in capital for activities carried out outside the company's production process.
3. Estimating Development Time
The higher or more funds spent on burning money, the company's financial development will tend to be hampered and slow.
At least the company must be able to estimate the time period it has to create innovation for company development and get the best results.
4. Managing Company Expenses
Managing finances in a company, whether it is a startup or a large company, is certainly very necessary. It should be noted that large expenses will be an obstacle for the company itself.
Therefore, by knowing the burn rate value, it is hoped that the company can be wiser in spending costs.
How to Calculate Burn Rate
Then how do you calculate the burn rate? There are two ways to calculate the burn rate, namely Gross Burn and Net Burn.
1. Gross Burn
A calculation method used to determine the company's expenses for operational costs. It contains all operational expenses such as rent, salaries, and costs incurred each month.
Gross Burn = Money Owned by the Company: Total Operating Costs Per Month
2. Net Burn
A calculation method that shows how quickly the company will spend money. Calculating the amount of losses or costs incurred per month that cause the company's cash flow to be negative. This Net Burn method can help companies find out how much money will be spent to continue operations within a specified period of time.
Net Burn = Money Owned by the Company: Total Operating Loss Per Month
Preparing Thorough Preparation
Burn Rate certainly has several benefits for start-up companies or those that have just been formed and established so that the development of the business chosen and undertaken can develop well and get good results.
Although simple, in fact this calculation plays an important role in the early journey of a business.
Burn Rate also teaches companies to be wiser in managing income and expenses, according to the budget they have.