When a company isn’t making a profit, they are spending the money that they have in the bank account. Often spending money without having revenue is quantified by your burn rate. A burn-rate is how quickly you are spending(burning through) money. Commonly burn-rate is reported by month (e.g. $30,000/month), but you could also see it reported by week.
Knowing what your burn rate is important. If you don’t know what your burn rate is, you will be surprised when you run out of money and close your doors. One of the artful responsibilities of CEOs of startups is to be sure that the company is getting the most value for every single dollar it spends. If you don’t have a lot of revenue, you need to make sure you are using every dollar innovatively. You must get a benefit for every cent of your investment.
There are other metrics of success once a business becomes cash-flow positive (taking in more cash than is going out). Most common is Return on Investment(ROI.) Return On Investment measures how much profit (revenue beyond expenses) your company makes for every dollar that you invested.
Burn Rate and Not-For-Profits
Non-profits must also keep burn-rate in mind. In a non-profit, you intend to get the most value for every dollar. This means that keeping a close eye on how quickly and where your money is going is important. If you are burning through your donation and grant revenue, but don’t see the impact you want, you need to consider how to slow the burn-rate or get more value for the money you are spending.
Whether you are a non-profit, a startup, or a business going through a rough patch, your burn-rate is a critical metric to keep your eyes on.