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.
See also
Frequently asked questions
What exactly does burn rate measure?
Burn rate measures how fast a company consumes its cash reserves to fund operations, usually expressed as a monthly amount. It applies to any business operating at a loss, not just startups, and it is the input that determines runway.
What is the difference between gross burn and net burn?
Gross burn is the total monthly cash spent on operating costs (salaries, rent, software, marketing), ignoring any revenue. Net burn subtracts monthly revenue from that figure and shows the real depletion of cash. Net burn is the number used to compute runway.
How do you calculate runway from burn rate?
Runway = cash on hand divided by net burn rate. A company with $1,200,000 in cash and a net burn of $150,000 per month has 8 months of runway. This figure tells a CFO or founder when a funding round or a cost cut becomes unavoidable.
Is a high burn rate always a bad sign?
No. A high burn rate is acceptable when it funds rapid, sustainable growth and the company can show what each dollar burned produces, such as new customers or ARR added. It becomes dangerous when runway shrinks without a credible path to revenue or new capital, which is why investors read burn rate as a proxy for capital efficiency and management discipline.
How much runway should a company raise for?
Companies typically raise enough to cover 18 to 24 months of runway. That window leaves time to hit the milestones needed for the next round without negotiating under cash pressure. Reducing net burn works as a complement: cutting gross burn from $200,000 to $170,000 with revenue flat at $50,000 takes runway on $1,200,000 of cash from 8 to 10 months.