Startups can determine their growth and development path by adopting and measuring key performance indicators and adopt appropriate solutions. The KPI of Burn Rate is one of the most important performance indicators for startups at the beginning of their activity. Burn Rate is the amount of money that a startup spends on a monthly basis and is one of the key performance indicators for business owners and investors. The key performance indicator of Burn Rate, which shows the negative cash flow of the startup, is in the category of financial key performance indicators.
Table of Contents
What is the key performance indicator of Burn Rate ?
As mentioned earlier, the key performance indicator of Burn Rate indicates the spent costs by the startup, which is usually considered on a monthly basis. The key performance indicator of Burn Rate is calculated in two ways: net Burn Rate and gross Burn Rate. Investors normally investigate the net Burn as an indicator of startup growth potential.
How is it calculated?
The calculation of the KPI of Burn Rate is described below.
Gross Monthly Burn Rate = Total expenses per month
Net Monthly Burn Rate = Total Monthly Expenses – Monthly Revenue
For example, if a startup spends $ 5,000 a month on rent, $ 10,000 on a server, and $ 15,000 a month on salaries, its gross Burn Rate will be $ 30,000, but if the same startup has reached a monthly income of $ 20,000, its net Burn Rate will be $ 10,000; in other words, the startup spent $ 10,000 more than its revenue that month. Therefore, in calculating the key performance indicator of gross Burn Rate, regardless of revenue, only considers monthly expenses, but in net Burn Rate, the amount of revenue is also calculated.
The KPI of Burn Rate helps startup owners to estimate the capital they need in the future. In addition, investors can predict the growth potential of startups and the next time for fundraising by examining the Burn Rate of startups.
Bear in mind that Burn Rate, like other key performance indicators, will vary for different startups depending on the business model, stage of maturity and industry.
What are the key performance indicators related to Burn Rate?
Although the key performance indicator of Burn Rate can be one of the best financial indicators for startups, it is usually utilized along with another key performance indicator called Runway.
Simply put, the key performance indicator of Runway is the amount of time a startup has until it runs out of cash, taking into account current costs and revenues, and it is obtained according to the following equation:
Runway = Cash / Monthly Burn Rate
To calculate a startup’s Runway, its Burn Rate must first be calculated. Suppose a startup has $ 30,000 and $ 15,000 at the beginning and end of the third quarter of the year respectively. Therefore, the startup has spent $ 15,000 over three quarter, and its monthly Burn Rate is $ 5,000. From dividing the startup’s current cash balance of $ 15,000 by its monthly Burn Rate of $ 5,000, it is expected that the startup will have only three months to finish its cash.
In general, the key performance indicator of Runway helps startups make the necessary plans for fundraising and revenue increase before running out of cash. According to global research, the second most common reason for startups failure is the depletion of their financial resources; therefore, they need to keep their KPI of Burn Rate as low as possible so that they would have more time before using up their financial resources. They can reduce their Burn Rate by outsourcing, hiring apprentices and avoiding additional costs. Moreover, since the process of fundraising is time-consuming, startups can reduce the risk of failure due to lack of financing by focusing precisely on this key performance indicator.
According to global statistics, the key number of key performance indicator of Runway for seed-stage startups is 18 months. In fact, startups should focus on their business to reach an acceptable point within 12 to 15 months, and then they have 3 to 6 months to complete the fundraising process.
It should be noted that the selection of key performance indicators for a business is influenced by the maturity level of the business, the market in which it operates, the competitive environment and many other factors that require sufficient knowledge and experience. Retiba’s experts are ready to carefully evaluate your startup business model, select key performance indicators, and analyze your business performance. All you have to do is enter your information in the evaluation application form and wait for Retiba’s experts to contact you.