What it means
A company that spends more than it earns is consuming its capital, and the burn rate measures how fast. The concept matters most where a business has raised money to fund a period of investment before revenue catches up: a technology start-up building a product, a biotech company running trials, a retailer opening stores ahead of profitability.
The cash raised is finite; the burn rate converts it into time. Gross burn is all cash out: salaries, rent, marketing, hosting, contractors, capital spending.
Net burn deducts cash in from customers (and grants or other operating receipts) and is the number that matters for runway. A company with gross burn of $400,000 a month and receipts of $150,000 has net burn of $250,000; with $3,000,000 in the bank it has twelve months of runway.
Both figures are reported, because gross burn shows the scale of the operation and net burn shows the trajectory. Runway is the burn rate's purpose.
Raising capital takes months (typically three to six for a venture round, longer in difficult markets), and a company that starts raising with less than six months of runway negotiates from weakness and may fail to close in time. The standard guidance is to plan for eighteen to twenty-four months of runway after a raise and to begin the next raise with at least nine months remaining.
Runway calculations should use forecast burn, not current burn, because burn usually rises as the company hires; and should include known future outflows (tax, a lease deposit, a debt repayment) that the monthly average hides. The burn rate also expresses a strategic choice.
Spending faster buys faster growth: more engineers, more marketing, more markets. If the growth raises the company's value by more than the cash consumed, a high burn is efficient; investors look at metrics such as burn multiple (net burn divided by net new recurring revenue) to judge whether the spending is buying enough growth.
A burn multiple of 1 means each dollar burned added a dollar of annual recurring revenue; above 2 or 3 is usually a warning. When capital is cheap and available, investors tolerate high burn for high growth; when it is scarce, the same burn becomes a liability and companies cut it hard.
Controlling burn means knowing its components and their levers. Headcount is usually 60% to 80% of burn, so hiring plans are the main control.
Marketing spend is the most adjustable. Contracts and leases create fixed commitments that cannot be cut quickly.
Finance teams in burning companies produce a monthly burn and runway report, a rolling forecast, and scenario plans showing how far runway extends under specified cuts, so that the board can act early rather than late.
In practice
Real-world examples.
Example
A biotech company with $60 million of cash and net burn of $2.5 million a month reports 24 months of runway, enough to reach its next trial readout.
Example
A marketplace start-up cuts net burn from $800,000 to $350,000 a month by reducing headcount 30% when its funding round falls through, extending runway from 7 to 16 months.
Example
A retailer opening stores reports a net burn of $1.2 million a month during its expansion and a plan to reach cash break-even at 40 stores.
Think of it
“Burn rate is how fast you're going through cash-like tracking how quickly your gas tank empties.
Formula
Calculation
Gross Burn Rate = Total cash outflows per month
Net Burn Rate = Cash outflows minus Cash inflows per month
Runway (months) = Cash balance / Net burn rate
Burn Multiple = Net burn in period / Net new annual recurring revenue added in period
Worked example. A software start-up has $4,200,000 in the bank at the start of the year. Its monthly figures:
- Salaries and contractors (28 staff): $310,000
- Office, hosting, software and other: $55,000
- Marketing: $70,000
- Gross burn: $435,000
- Customer receipts: $145,000 (annual recurring revenue $1,740,000)
- Net burn: $290,000
Runway = $4,200,000 / $290,000 = 14.5 months.
The plan is to hire 10 more engineers and salespeople over the next two quarters, raising salaries to $420,000 and marketing to $110,000, so gross burn rises to $585,000 by month 7. Receipts are forecast to grow to $260,000 by month 12 as the sales team ramps. The forecast cash balance at month 12: cumulative net burn over the year, month by month, comes to about $4,150,000, leaving $50,000. Runway on the plan is barely twelve months, which means the company would need to close a new round within nine months of starting the hiring, and fundraising takes at least four.
Burn multiple check: over the year, net burn of $4,150,000 adds annual recurring revenue of $3,120,000 minus $1,740,000 = $1,380,000. Burn multiple = 3.0. Investors will regard that as high; the growth is not efficient enough for the spending.
Revised plan: hire 5 rather than 10, delay the marketing increase to month 6, and cut office cost by going remote for two teams, with the smaller sales team concentrated on the highest-yielding channel. Gross burn peaks at $510,000; receipts forecast $250,000 by month 12; cumulative net burn $3,510,000; cash at month 12 $690,000; and the raise can begin at month 8 with about $1,780,000 in the bank and net burn of $295,000, six months of runway. Burn multiple improves to about 2.8, still high, so the board sets a target below 2 for the following year. The board approves the revised plan with a trigger: if receipts are more than 15% below forecast at month 6, marketing spend is cut immediately.Case study
Seen in the real world.
A consumer app company raised $12,000,000 and, on the strength of rapid user growth, built its team to 60 people within a year. Net burn reached $900,000 a month. The board tracked user growth and revenue but the burn rate appeared in the finance pack only as an actual figure, with no forecast and no runway calculation.
When the chief executive began the next fundraise, the finance lead produced the runway for the first time: $5,400,000 in the bank, six months. The market had turned; investors who had been eager a year earlier now wanted evidence of revenue efficiency, and the company's burn multiple of 4.5 was the first thing they asked about. The round took seven months to close, at a valuation below the previous one, and only after the company had cut a third of its staff to extend runway and had shown two months of the improved burn.
The new lead investor required a monthly burn and runway report with a rolling 18-month forecast, a burn multiple target below 2, and a board rule that any hiring plan be accompanied by its effect on runway. The chief executive's reflection was that the company had managed growth with precision and cash with none, and that the two should have been on the same page from the start.
Watch out
Common mistakes.
- Calculating runway from current burn when a hiring plan will raise burn substantially within months. Use the forecast.
- Leaving fundraising until runway is short. Raising takes months, and a company with three months of cash has no negotiating position.
- Watching gross burn only, or net burn only. Gross shows scale and commitments; net shows the trajectory; both matter.
Questions
People also ask.
What is a good burn rate?
There is no universal figure. The test is whether the burn buys growth efficiently (burn multiple) and whether runway is long enough to reach the next milestone with margin for a raise.
Is burn rate relevant to profitable companies?
Only in phases of investment or crisis. The same arithmetic applies to any business consuming cash: a company with a loss-making new division, or one in a downturn, should know its burn and runway.
How much runway should a start-up keep?
Conventionally 18 to 24 months after a raise, and begin the next raise with at least 9 months left. In tight markets, more.
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