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What is burn rate?

In business, burn rate is usually the monthly amount of cash spent in the early years of a start-up business. Burn rate is an important metric since the new business must spend time and money developing a product or service before it obtains cash from revenues.

If a company has $200,000 in initial cash and its burn rate is $20,000 per month, the company will be out of cash in 10 months unless it raises additional money, begins to generate significant revenues, or reduces its burn rate. Hence, it is important that a start-up business monitor all of its expenditures and avoid payments that will not speed up or increase revenues.

The cash flow statement, formally known as the statement of cash flows, is an important financial statement that can be helpful in computing a realistic burn rate.