Burn rate is how fast a company is spending its cash. It is typically measured monthly and is a critical metric for startups that are not yet profitable.
Investors and founders use it to understand how long a company can operate before it runs out of money.
What is the difference between gross burn rate and net burn rate?
Gross burn rate is total monthly spending. Net burn rate is the actual cash lost each month after accounting for any revenue coming in.
Metric | Definition | Example |
Gross burn rate | Total monthly expenses | $400,000/month |
Revenue | Cash received from customers | $150,000/month |
Net burn rate | Cash lost per month | $250,000/month |
Net burn rate is more useful for understanding true cash consumption.
How is burn rate calculated?
For net burn, subtract monthly revenue from monthly expenses. For gross burn, simply total all expenses for the month.
Some companies calculate it as the average over three to six months to smooth out seasonal swings.
What is runway and how does it relate to burn rate?
Runway is how many months a company can operate at its current burn rate before cash runs out. The formula is: Cash on Hand divided by Net Burn Rate.
A company with $3 million in cash and a $250,000 monthly net burn has 12 months of runway. Most advisors recommend maintaining at least 18 months.
What is a healthy burn rate for a startup?
There is no universal answer, but the burn rate should be in proportion to the growth it is funding. A startup spending $500,000 a month with flat revenue is in trouble. One spending the same while growing 20 percent month over month is a different story.
About 38 percent of startups fail because they run out of cash, according to CB Insights.
How can companies reduce their burn rate?
Reducing burn requires identifying where money is going and cutting what is not generating return.
Audit recurring software subscriptions and vendor contracts
Delay non-critical hires
Renegotiate office lease or go remote
Cut marketing spend on low-converting channels
Accelerate collections from customers
Key Takeaways
Description | |
Definition | The rate at which a company spends cash each month |
Gross vs. net | Gross = total expenses; net = expenses minus revenue |
Runway formula | Cash on Hand divided by Net Burn Rate |
Healthy target | Most advisors recommend 18 or more months of runway |
Key risk | 38% of startups fail from running out of cash |
Frequently Asked Questions
Is burn rate the same as cash flow?
Not exactly. Burn rate focuses specifically on cash spending. Cash flow is broader and includes all inflows and outflows, including financing activities.
When should a startup try to reduce its burn rate?
When runway drops below 12 months without a clear path to profitability or a new funding round in progress. Earlier is always better.
Does burn rate matter for profitable companies?
Less so. Burn rate is most relevant for pre-revenue or pre-profit companies. Profitable businesses focus more on cash flow management.
What is the difference between burn rate and runway?
Burn rate is a speed. Runway is a duration. Knowing both helps leadership understand how urgently they need to raise capital or cut costs.
