Get to know Burn Rate (Burn Money) from Understanding to Examples

Are you planning to start building a startup business? Of course, before setting up a company, careful and accurate analysis and calculations are needed. The goal is that your company does not experience bankruptcy and business losses in the future.

The sign is that when you are building a startup, the first thing you need to understand is what is the burn rate, or what most people call "burning money".

To prevent your company from going bankrupt, it is important for you to understand the term burn rate because this will help you manage investor funds well. Do you want to delve deeper? Check out this article now until it's finished. 

Definition of Burn Rate (Burn Money)

Burn rate is one of the terms used in the business world, especially finance. This term refers to how much money a startup spends, especially before the company manages to generate any revenue. The money used for these expenses is called the amount of fuel or "burn money".

In the corporate world, this term is also known as negative cash flow. The reason is that the company's funds, especially venture capital, are not flowing optimally. The fee is only in the first month of company establishment. 

Why is it important to know the burn rate?

Calculating burn rate isn't just about figuring out how much a startup is spending. But investors also use it as a step to understand the feasibility of your startup.

By calculating and measuring the company's burn rate, investors can calculate how long it will take startups to run out of cash. It also prevents startup companies from going bankrupt. Therefore, calculating the burn rate is very important for investors when launching a startup. This is because the burn rate is an investor's step in measuring the financing provided and then adjusting it to reflect the cost of the burn rate. 

How to Calculate It?

Entrepreneurs must understand the basic concepts of finance. One of the benefits is knowing the company's BR level. The calculation is actually quite simple. This calculation requires the company's cash flow in a period, for example cash flow. The calculation is divided into two parts, namely:

1. Gross Burn Rate

The calculation of the gross burn rate is the same as calculating the company's monthly expenses. For example monthly salary, rent, electricity and many other monthly expenses. Knowing the company's GBR makes it easier to optimize monthly expenses.

GBR = cash / amount of monthly expenses

Example:

Fertilizer industry startups are trying to lower BR levels. After recording, it was revealed that the cash amounted to Rp. 10 million. Monthly expenses for salaries, rent and purchase of raw materials are 2 million euros per month.

GBR = 10 million / 2 million = 5

A value of 5 means the company only has 5 months before running out of money.

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2. Net Burn Rate

The next calculation method is the net burn rate. Companies mostly use this method to calculate the burn rate. This burn rate uses the cash balance divided by the amount lost for the period. NBR = cash/loss for the financial year

Example:

Startup A starts selling 2 million per month. The company's record spending is 3 million euros per month. The company suffered a loss of one million this month.

The cash value is IDR 10 million. The bill is

NBR = 10 million / 1 million = 10

So the value is 10. This means the company only has 10 months before it runs out of money to run the company.

These calculations are mostly preliminary. The burn rate is not used when the cash flow has reached a positive point. However, when starting a business, it is very useful to know how to calculate it. 

Thus the explanation of the burn rate. Hopefully this article can give you a deeper understanding