Burn, Baby, Burn
“Spend each day trying to be a little wiser than you were when you woke up.” Charlie Munger
“Burn Rate”: An Important, Often Overlooked Metric
Two important metrics to private company investors in growth companies are:
(i) The monthly “burn rate” (historical and projected), and;
(ii) How many “months of runway” (months of cash in the bank) does the business have.
In my experience, “burn rate” is not something most CEOs/founders track as a metric in their week-to-week business cadence or discuss regularly at the Leadership Team meetings.
In most start-ups the founding team does not have a deep background in finance. As builders and optimists, they are more focused (and rightly so) on the big market opportunity ahead of them. Their top priority is to invest in (hire) the right people to build and sell their product or service.
My work, as a fractional CFO and business coach, is predominantly with early-stage businesses that are growing but not yet profitable. One of my roles is to alert CEOs and co-founders on a regular basis, at least monthly, on changes in the burn rate and its implications for the business trajectory. I regularly evaluate recent performance and reforecast future performance (based on the sales funnel and investment priorities) to estimate the likely remaining months of runway.
I have had a number of recent discussions with clients on this topic. And these conversations have helped me realize this topic merits a short article.
Common Questions I Encounter
How is “burn rate” defined? How is it different from total expenses, EBITDA or net income?
Why was the actual monthly burn rate different (more or less) than we had forecast?
What is an appropriate or defensible monthly burn rate? Obviously less is always better than more.
How do I balance growth and burn rate? What matters more to investors?
Definitions
