What it means
A loss-making company is a countdown. Every month it spends more than it collects, its bank balance falls, and at some point it must either reach break-even, raise more money or close.
Burn rate turns that countdown into a number that founders, boards and investors can manage. It is deliberately a cash measure rather than an accounting one, because accounting losses can be softened by non-cash items while the bank balance cannot.
Gross burn counts everything paid out: salaries, rent, cloud hosting, marketing, contractors, tools. Net burn subtracts cash coming in from customers.
A company with $400,000 of monthly costs and $250,000 of monthly receipts has a gross burn of $400,000 and a net burn of $150,000. Net burn is what shortens the runway; gross burn shows how much is at stake if revenue disappears.
Runway is the reason burn rate matters. Investors typically expect a start-up to raise enough to last 18 to 24 months, because raising the next round takes six months or more and the company needs to show progress in between.
A founder with 12 months of runway is already late to start fundraising. Boards watch burn rate monthly and expect a plan for what happens when runway falls below a threshold, whether that is cutting costs, raising money or reaching profitability.
Burn rate is also a measure of efficiency when read against growth. Burning $150,000 a month to add $50,000 of new monthly recurring revenue is a very different business from burning the same amount to add $5,000.
Investors compare burn to growth through measures such as the burn multiple (net burn divided by net new revenue) and expect the ratio to improve as a company matures.
In practice
Real-world examples.
Example
A founder with $500,000 raised and a net burn of $50,000 a month has ten months of runway and needs to begin the next fundraise almost immediately.
Example
A consumer app cuts its marketing spend by half after finding that paid users churn quickly, reducing net burn from $180,000 to $110,000 and extending runway from 9 to 15 months.
Example
An established company running a new division at a loss tracks the division's burn rate separately to decide how long it will continue funding the experiment.
Think of it
“Burn rate is how fast you're spending money-the speed at which your cash disappears.
Formula
Calculation
Gross Burn Rate = Total monthly cash outflows
Net Burn Rate = Total monthly cash outflows minus Total monthly cash inflows
Runway (months) = Cash balance / Net Burn Rate
Burn Multiple = Net Burn / Net New Annual Recurring Revenue added
Worked example. A software start-up has $2.4 million in the bank. Last month it paid out $320,000 (salaries $220,000, hosting and tools $40,000, marketing $45,000, office and other $15,000) and collected $120,000 from customers.
- Gross burn = $320,000
- Net burn = $320,000 minus $120,000 = $200,000
- Runway = $2,400,000 / $200,000 = 12 months
If the company hires four engineers at a cost of $40,000 a month, net burn rises to $240,000 and runway falls to 10 months. If instead revenue grows by $20,000 a month each month, net burn falls steadily and runway extends: after six months net burn would be $80,000 and the remaining $1.56 million would last more than 19 months.
Burn multiple: if the company added $600,000 of annual recurring revenue over the last quarter while burning $600,000 net, its burn multiple is 1.0, which most investors would regard as healthy for an early-stage business.Case study
Seen in the real world.
A fintech start-up raised $6 million and, flush with cash, hired aggressively. Within eight months monthly net burn had reached $550,000, leaving $1.6 million and under three months of runway, at exactly the point when the market for new funding tightened. The board demanded an immediate plan.
The founders cut headcount by 30%, renegotiated the office lease, moved to usage-based cloud pricing and paused all paid marketing, taking net burn to $210,000. They also shifted the sales team from new logos to upselling existing customers, which raised monthly receipts by 25% within a quarter.
Runway stretched to just over nine months, enough to close a smaller bridge round from existing investors on the strength of the improved burn multiple. The company survived, but the founders later said the mistake was never having agreed with the board what burn rate the plan allowed before the money arrived.
Watch out
Common mistakes.
- Measuring burn on accounting profit rather than cash. Deferred revenue, accruals and depreciation can make losses look smaller or larger than the cash actually leaving.
- Calculating runway from last month's burn when next month's is already committed to be higher, for example because new hires start.
- Leaving fundraising until runway is short. Raising from a position of weakness costs equity and control.
Questions
People also ask.
What is a good burn rate?
There is no universal figure. It should be consistent with the runway the company needs to reach its next milestone with six months to spare.
How is burn rate different from cash flow?
Net burn is negative operating cash flow expressed as a monthly rate. A profitable company has no burn.
Should burn include one-off costs?
Track them separately. A one-off legal bill distorts the trend, but it still reduces the cash and the runway.
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