What it means
A young company often spends on staff, software and marketing before sales are large enough to pay for them. The gap is funded from cash raised from investors.
Burn rate measures how fast that cash is being used up. There are two versions.
Gross burn is the total of all monthly cash spending, while net burn is the spending minus any cash coming in from customers. Net burn is the one that shows how quickly the bank balance is actually falling.
The most useful companion figure is runway, which is the number of months the business can keep going at the current burn rate. Runway is calculated by dividing cash by net burn.
Founders and investors watch it closely, because it tells them how soon fresh funding must be found. Managers can act on both sides of the equation.
They can raise revenue, which reduces net burn, or cut or delay costs, which reduces gross burn. The right choice depends on whether growth or survival is the priority.
Burn rate is not automatically bad. A company that burns cash to build a product or win customers with strong returns may be making a sound investment.
What matters is whether each dollar spent is producing growth at an acceptable price. Measurement needs care.
Use cash movements, not accounting profit, since profit includes non-cash items and timing differences. A big annual contract paid upfront or a large supplier bill due next month can distort a single month, so many teams use a three-month average.
In practice
Real-world examples
Example 1
A software start-up with $3,000,000 in cash burns $250,000 a month. Its CEO calculates a runway of 12 months and begins fundraising at month six, so there is time to negotiate without pressure. A company that waits until the last two months often accepts worse terms.
Example 2
A biotech company has no revenue and a gross burn of $500,000 a month. Because net burn equals gross burn, runway is simply cash divided by spending. The board approves hiring only if each role speeds up the research timetable. The CFO reports runway to the board at each meeting.
Example 3
An online grocery business sees its burn rise as it opens new warehouses. The CFO shows the board that each warehouse is expected to turn cash-positive within a year, and the board accepts the higher burn for that period. They agree on a limit so that the burn cannot rise beyond a set level without a fresh vote.
Think of it
Burn rate is how fast you're spending money-the speed at which your cash disappears.
Formula
Calculation
Net burn rate = Monthly cash outflows - Monthly cash inflows
Runway (months) = Cash balance / Net burn rate
Suppose a start-up has $1,200,000 in the bank, monthly cash spending of $300,000 and monthly cash receipts of $100,000.
Net burn = 300,000 - 100,000 = $200,000 a month. Gross burn is $300,000.
Runway = 1,200,000 / 200,000 = 6 months. If receipts grow to $150,000, net burn falls to $150,000 and runway extends to 1,200,000 / 150,000 = 8 months.Case study
Seen in the real world
Quickpay Labs is a fictional payments start-up that raised $2,400,000 and spent freely on marketing in its first year. Its monthly net burn reached $300,000, which gave a runway of just eight months.
The CFO prepared a plan with two scenarios. The first cut marketing and paused hiring to reduce burn to $200,000, extending the illustrative runway to twelve months. The second kept spending to chase growth and required a new funding round within six months.
The board chose a middle path, trimming the weakest campaigns and tying hiring to revenue targets. This gave the company enough time to reach a funding round from a position of strength. The CFO now updates the burn and runway figures every month and shares them with the whole leadership team, so everyone understands how their spending decisions affect the date on which the cash runs out.
Watch out
Common mistakes
- Confusing gross burn with net burn. Net burn includes the cash coming in, and it is the figure that drives runway.
- Using accounting profit instead of cash flow. Non-cash items and timing differences can hide the real rate of cash use.
- Assuming runway stays fixed. Burn changes as the company hires, spends and earns, so the estimate needs regular updating, ideally every month with a rolling average.
Questions
People also ask
What is a good burn rate?
It depends on the stage and the growth achieved, so it is best judged against the results the spending produces. A burn that buys fast, profitable growth is healthier than a lower burn that buys nothing.
When should a company start raising money?
Many founders start with at least six to nine months of runway, since fundraising often takes several months.
Can an established company have a burn rate?
Yes, any business with negative cash flow burns cash, although the term is most often used for start-ups. A mature firm would usually call the same thing a cash deficit.
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