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What’s burn rate and its relation to Revenue, which is crucial for survival of your startup
In simple terms burn rate is the rate at which you will spend money month on month for a particular term with specific purpose to increase revenues of your startups.
Lets understand the relation of burn rate to revenue, for example if you wanted to do advertising campaign to build brand for your brand for next six months where in you are going to spend funds and are hope full that this activity is essential and it will benefit your start ups in terms of market penetration or creating awareness and this will ensure your revenue will increase.
In simple terms it looks easy to see that burn rate relation with revenue is directly proportional yes it is but lets see a scenario where in this does not happen and what could be the consequence on your company.
So with all the planning you spend 30 lakhs for a period of 3 months for advertising so the burn rate is 10 lakhs per month and you had projected with this type of burn you will increase revenue 10 times the present revenue as you had forecasted based on your existing traction.
After having spent 30 lakhs the revenue didn’t increase the way it was forecasted then what happens the burn rate would have sent your cash flow to negative and you start new measures to correct this by taking financial measures of pumping in money to ensure that the dent created by this burn rate is taken care.
So when you are forecasting burn rate with revenue by very conservative and also have period where you will stop if things don’t go the way you want it, as you now once a plane is on full throttle and corrections during take off will steer you in further danger.
So stop the burn rate keep clarity with regard to the duration of stopping before you entering point of no return