What is Burn Rate?
The rate at which a company spends cash, typically measured monthly. Critical for understanding how long you can operate before running out of money.
Key Takeaways
- •Burn rate measures monthly cash spending, used to calculate runway
- •Gross burn = total monthly expenses; Net burn = expenses minus revenue
- •Runway = current cash / monthly net burn rate
- •Investors want efficient burn with 12-18+ months of runway
Burn Rate Definition
Burn rate is the rate at which a company uses its cash reserves, typically expressed as a monthly figure. It's most commonly discussed in the context of startups and growth-stage companies that are not yet profitable.
There are two types of burn rate:
Gross Burn Rate
Total monthly operating expenses, regardless of revenue.
Net Burn Rate
Monthly cash outflow after accounting for revenue.
Burn Rate Calculation Examples
Example: Pre-Revenue Startup
Monthly Expenses:
- Salaries: $80,000
- Rent/Utilities: $5,000
- Software/Tools: $3,000
- Marketing: $10,000
- Other: $2,000
Burn Rate:
Gross Burn: $100,000/month
Net Burn: $100,000/month (no revenue)
Cash: $1,200,000
Runway: 12 months
Example: Growing Company with Revenue
Monthly Financials:
- Revenue: $150,000
- Total Expenses: $200,000
Burn Rate:
Gross Burn: $200,000/month
Net Burn: $50,000/month
Cash: $900,000
Runway: 18 months
Calculating Runway
Runway is how many months you can operate at current burn rate before running out of cash:
| Cash | Net Burn | Runway | Status |
|---|---|---|---|
| $500K | $100K | 5 months | Critical |
| $1M | $100K | 10 months | Start fundraising |
| $1.8M | $100K | 18 months | Healthy |
Fundraising Lead Time
Fundraising typically takes 3-6 months. If you have 12 months of runway, you should start fundraising now to close before you're desperate. Investors can sense urgency and will negotiate harder. Learn about gross margin benchmarks and valuation methods that investors use to assess your business.
Managing Burn Rate
Track Weekly
Don't wait for month-end. Monitor cash position weekly and understand what's driving changes.
Forecast Forward
Build a 13-week cash flow forecast to see problems coming and react before they're crises.
Extend Runway
Consider raising more capital earlier, cutting costs, or accelerating revenue to extend runway.
Default Alive?
At current trajectory, will you reach profitability before running out of cash? Understanding your unit economics and pricing strategy is key.
Reducing burn requires understanding your key profit levers, unit economics, and pricing strategy. Watch for warning signs like high customer concentration that could cause revenue volatility.
Frequently Asked Questions
What's a good burn rate?
There's no universal 'good' burn rate—it depends on stage, growth rate, and runway. Investors typically want 12-18+ months of runway. Mature businesses should aim for net positive (profitable). Early-stage startups burning $100K-$200K/month with strong growth may be acceptable; burning that much with flat growth is concerning.
How can we reduce burn rate?
Common levers: reduce headcount (largest expense for most companies), renegotiate vendor contracts, optimize marketing spend, slow hiring, delay capital expenditures, sublease office space. Focus on cuts that don't destroy core value creation. 20-30% burn reduction is often achievable without major damage.
Should I focus on gross or net burn?
Net burn is generally more relevant because it reflects actual cash consumption including revenue. However, gross burn helps understand fixed cost structure and what happens if revenue drops. Track both: gross burn shows your expense discipline; net burn shows overall business efficiency.
How do investors view burn rate?
Investors want efficient burn—high return on capital deployed. They calculate 'burn multiple' (net burn / net new ARR) to assess efficiency. A burn multiple under 1x is excellent (adding $1 ARR for every $1 burned). Over 2x typically requires explanation of why spending will generate future returns. Customer concentration and pricing strategy also factor into their assessment.
Related Terms & Resources
13-Week Cash Flow Template
Manage cash and track burn
ARR (Annual Recurring Revenue)
Track revenue to offset burn
Cash Conversion Cycle
Understand cash timing
CFO for Fundraising
When to raise vs. cut burn
Need Help Managing Cash?
A fractional CFO can help you build cash forecasts, optimize burn rate, and extend runway through smart financial management.
Get Started