Burn Rate
Also: Cash Burn Rate, Net Burn, Gross Burn
Burn rate is the speed at which a company spends its cash reserves, usually measured per month, before reaching profitability or raising more funding.
What It Is
Burn rate measures how quickly a company uses up its cash reserves to fund operations before it becomes cash flow positive. It is most commonly expressed as a monthly figure and is a core metric for startups and any business operating at a loss.
There are two standard variants:
- Gross burn rate: the total cash a company spends each month on operating costs (salaries, rent, software, marketing, and so on), regardless of revenue.
- Net burn rate: gross burn minus monthly revenue, showing the actual depletion of cash reserves.
Why it matters
Burn rate is directly tied to runway, the number of months a company can keep operating before it runs out of cash. Runway is calculated as:
`Runway = Cash on hand / Net burn rate`
For a CFO or founder, this number drives critical decisions: when to raise funding, when to cut costs, and how aggressively to invest in growth. A high burn rate is not inherently bad if it fuels rapid, sustainable growth, but it becomes dangerous when runway shrinks without a clear path to revenue or new capital.
Investors scrutinize burn rate closely because it signals capital efficiency and management discipline.
How it is used in practice
- Cash planning: Finance teams track net burn monthly to forecast when funding is needed.
- Fundraising: A company typically raises enough to cover 18 to 24 months of runway.
- Cost control: Rising burn without matching revenue growth triggers reviews of hiring, vendor spend, and marketing budgets.
- Unit economics: Burn is compared against growth metrics like new customers or ARR added per dollar burned.
Concrete Example
A SaaS startup holds $1,200,000 in cash. Each month it spends $200,000 on costs (gross burn) and earns $50,000 in revenue.
- Net burn = $200,000 - $50,000 = $150,000 per month
- Runway = $1,200,000 / $150,000 = 8 months
With only 8 months left, the CFO must either raise a new round, increase revenue, or reduce spending. If the team cuts costs to $170,000 gross burn while revenue stays flat, net burn drops to $120,000 and runway extends to 10 months, buying time to close a funding round.