What is ‘burn rate’?
Whether you’re a start-up or enterprise-level business, burn rate is something you should be aware of. You also need to know how best to manage it.
So, what is burn rate? In simple terms, it refers to the rate at which a company is losing money. Gross burn rate represents how much cash a business is burning through every month, before reaching profitability.
If you’re in the early stages of business and your burn rate is high, don’t worry. New SMEs and start-ups often have a high burn rate in the early stages of business, as their focus is more likely to be on investing in growth rather than consistent revenue streams.
The importance of reducing burn rate for start-ups
Even though a higher burn rate is common in this scenario, it is important for startups, especially those reliant on investor capital, to maintain a reasonable burn rate. This is because if a company’s burn rate is too high, it may run out of money before it becomes sustainable, rendering all its potential and hard work null. A low burn rate on the other hand, allows for more time to adjust the business model and pivot when necessary.
1. Analysing your current burn rate
Analysing your burn rate is the first step to understanding how it impacts your business. Here’s what you’ll need to assess for the full picture:
Calculating your burn rate
Calculating your burn rate is simple. To do this you need to subtract your monthly revenue from your monthly expenses. The outcome will give you an idea of how quickly you're using your capital reserves or incurring debt.
Identifying business expenses
- Business invoices
- Supplies, etc.
- Monthly maintenance fees associated with an international business account.
- International shipping fees
- Local salaries
2. Identifying key cost drivers
Categorise your expenses
- essential (like salaries or rent).
- and non-essential (such as fancy office equipment or team outings).
Analyse your biggest cost drivers
3. Optimising your team
Conduct regular skill assessments
4. Maximising lean operations
- Making the most of limited resources.
- Scalability with ease.
- Gaining a competitive edge.
Implement automation into your operations
Analyse your processes
5. Removing non-performing projects
Evaluate your current projects
Building a burn rate reduction plan for your business
Now that we know all about what contributes to burn rate, let’s look into how you can reduce it to help your business thrive.
First things first, increase your revenue
- Renegotiating contracts
- Optimising technology use
- Shifting to remote work setups
- Improving inventory management
- Refining marketing strategies
So, what’s the ideal burn rate for a start-up?
Hassan Braha - VP of Finance at 3S Money
Ultimately, an ideal burn rate is one that aligns with a start-up’s strategic goals, considering its stage and industry. While a high burn rate might be acceptable in the initial phases, it’s crucial to constantly monitor and adjust it in response to changing circumstances.
Remember, the aim isn't merely survival, but to thrive. With vigilance and proactive management, start-ups can optimise their burn rate, ensuring they're best positioned for long-term success. So, take the steps outlined above and lay a strong foundation for your start-up’s future.
Scaling up can be difficult, but having a multi-currency account is a great way to make the process easier, access new markets and help your business thrive.
With a 3S money International Business Account, you can even open sub-accounts to help keep on track with your global business expenses and streamline your accounting process. Get started today with a 3S Money International Business Account today.
Burn rate FAQs
The average burn rate for start-ups varies based on several factors such as: start-up stage, industry, business model, growth strategy, and funding availability. One study by Scale Venture Partners found that the monthly average for early-stage startups is approximately $50,000 per month.
This depends on things like the company, the industry, the business model, and the amount of seed funding. For example, a company's burn options will be very different with a seed round of $50K, $500K, or $5M.
In addition to the tips provided in our blog, start-up owners can also harness the power of strict budgeting when it comes to expenses like employee salaries, office space rent, sales, marketing, R&D and cost of goods.