Net Burn rate is particularly important for startups because it helps measure how quickly they are burning through their available capital in relation to their revenue. In SaaS companies, burn rate and revenue are typically measured month to month. Executives and investors use Net Burn to understand the company’s runway, or how long they have before they run out of money.
There are no hard and fast benchmarks for how fast a startup should be burning through invested cash. Venture Capitalists want to see that the money they’ve invested is being used to fund growth. However, companies that spend cash too quickly risk running out of it. In such cases, a fast growing company, that appears to be approaching profitability, could be at risk of going under. That said, when companies are in a conscious growth period, they may be burning cash faster as part of the plan to acquire customers quickly.
Businesses want their Net Burn rate to be low so that they can maintain their business for a long time before needing to secure another round of funding and to avoid bankruptcy. One way to do this is by keeping expenses low. If expenses increase and sales decrease then the Net Burn rate will increase quickly and the company’s runway will shorten.
There are two common methods for measuring Net Burn: By subtracting Gross Margin (Revenue minus Cost of Goods Sold) from Operating Expenses or by subtracting your ending cash balance from your starting cash balance for any given period.