Burn Rate

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Burn Rate

Burn rate measures how quickly a company uses its cash reserves before reaching positive cash flow. It’s a critical metric for startups and pre-profit companies, helping founders and investors understand how long a business can operate without new funding.

Key takeaways

  • Burn rate shows how fast cash is being depleted and determines financial runway.
  • Gross burn = total monthly operating expenses.
  • Net burn = monthly cash outflow after accounting for cash inflows (revenue minus cost of goods sold).
  • Runway = cash on hand ÷ net burn.
  • Reduce burn by cutting costs or increasing revenue to extend runway.

Types of burn rate

  • Gross burn: Sum of all monthly operating expenses (payroll, rent, software, etc.).
  • Formula: Gross burn = Total monthly operating expenses
  • Net burn: Monthly cash lost after subtracting cash inflows.
  • Formula: Net burn = Gross burn − (Monthly revenue − Cost of goods sold)
  • Net burn ≤ Gross burn. If net burn is negative, the company is cash-positive.

Calculating burn rate and runway

  1. Calculate gross burn (sum of monthly expenses).
  2. Calculate net cash inflow: Monthly revenue − Cost of goods sold (COGS).
  3. Calculate net burn: Gross burn − Net cash inflow.
  4. Calculate runway: Cash on hand ÷ Net burn.

Example:
* Gross burn = $30,000/month (office $5,000 + servers $10,000 + salaries $15,000)
* Revenue = $20,000/month; COGS = $10,000 → Net cash inflow = $10,000
* Net burn = $30,000 − $10,000 = $20,000/month
* With $100,000 in the bank → Runway = $100,000 ÷ $20,000 = 5 months

What is a “good” burn rate?

A common guideline is to maintain enough cash for 3–6 months of operations. For example, with $100,000 on hand, achieving:
* 3 months of runway → net burn ≈ $33,333/month
* 6 months of runway → net burn ≈ $16,667/month

Actual targets vary by stage, business model, and investor expectations; some companies and investors prefer longer runway.

How to manage and reduce burn rate

  • Cut discretionary spending: marketing, travel, and nonessential subscriptions.
  • Reduce fixed costs: renegotiate leases, move to lower-cost providers, outsource.
  • Adjust staffing: hiring freeze, selective layoffs, or reducing contractor spend.
  • Increase revenue: improve pricing, accelerate sales, or expand monetization.
  • Improve unit economics: lower COGS or increase gross margins.

Bottom line

Burn rate is a simple but essential metric that dictates how long a startup can operate without additional capital. Regularly tracking gross and net burn, calculating runway, and taking timely actions to reduce burn or boost revenue are vital to preserve financial health and improve fundraising prospects.