Burn rate
What is burn rate?
Burn rate is a financial metric that measures the speed at which a company, typically a startup or early-stage business, spends its available cash reserves before generating positive cash flow or profits. It is most commonly expressed as the amount of cash consumed per month and serves as a key indicator of how long a company can continue operating before needing additional funding.
Key takeaways
Cash consumption pace
Burn rate shows how quickly a company is using up its cash, often quoted as a monthly figure (e.g., "$100,000 per month").
Types of burn rate
- Gross burn rate: The total monthly operating expenses, regardless of revenue.
- Net burn rate: The net cash lost each month after accounting for monthly revenues (i.e., total expenses minus total revenues).
Startup focus
Burn rate is especially important for startups that are not yet profitable and rely on investor funding to cover ongoing costs.
Financial runway
Burn rate determines a company’s “runway”-how many months it can operate before running out of cash. Runway is calculated as: Runway = Monthly Net Burn Rate/Total Cash Reserves
For example, $1,000,000 in cash and a $100,000 monthly burn rate equals a 10-month runway.
Why does burn rate matter?
Burn rate is a key metric for both investors and company leaders, offering insight into financial health and the urgency of raising new capital. A high burn rate may indicate aggressive spending, while a low one could mean missed growth opportunities. Understanding and tracking burn rate enables better planning for hiring, marketing, and fundraising, and acts as an early warning signal to help companies avoid unexpected cash shortfalls.
How to calculate burn rate
Gross burn rate
Gross burn rate = Total Monthly Operating Expenses
Net burn rate
(Total Monthly Operating Expenses) – (Total Monthly Revenues)
Alternative net burn calculation:
Net Burn Rate = Starting Cash- Ending Cash/Number of Months
Impact on business and operations
Determines how long a company can operate before needing new funds.
Encourages careful management of expenses.
Influences fundraising strategy and investor confidence.
High burn rate increases the risk of running out of cash.
Real-world examples
A startup spends $80,000 per month on salaries, rent, and marketing (gross burn rate). If it earns $20,000 in monthly revenue, its net burn rate is $60,000. With $600,000 in the bank, its runway is 10 months ($600,000 ÷ $60,000 per month).
Disclaimer: The information provided in this business glossary is for educational purposes only and should not be considered as financial advice. Always consult with qualified financial professionals before making investment decisions.
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Table of Contents
What is burn rate?
Burn rate is a financial metric that measures the speed at which a company, typically a startup or early-stage business, spends its available cash reserves before generating positive cash flow or profits. It is most commonly expressed as the amount of cash consumed per month and serves as a key indicator of how long a company can continue operating before needing additional funding.
Key takeaways
Cash consumption pace
Burn rate shows how quickly a company is using up its cash, often quoted as a monthly figure (e.g., "$100,000 per month").
Types of burn rate
- Gross burn rate: The total monthly operating expenses, regardless of revenue.
- Net burn rate: The net cash lost each month after accounting for monthly revenues (i.e., total expenses minus total revenues).
Startup focus
Burn rate is especially important for startups that are not yet profitable and rely on investor funding to cover ongoing costs.
Financial runway
Burn rate determines a company’s “runway”-how many months it can operate before running out of cash. Runway is calculated as: Runway = Monthly Net Burn Rate/Total Cash Reserves
For example, $1,000,000 in cash and a $100,000 monthly burn rate equals a 10-month runway.
Why does burn rate matter?
Burn rate is a key metric for both investors and company leaders, offering insight into financial health and the urgency of raising new capital. A high burn rate may indicate aggressive spending, while a low one could mean missed growth opportunities. Understanding and tracking burn rate enables better planning for hiring, marketing, and fundraising, and acts as an early warning signal to help companies avoid unexpected cash shortfalls.
How to calculate burn rate
Gross burn rate
Gross burn rate = Total Monthly Operating Expenses
Net burn rate
(Total Monthly Operating Expenses) – (Total Monthly Revenues)
Alternative net burn calculation:
Net Burn Rate = Starting Cash- Ending Cash/Number of Months
Impact on business and operations
Determines how long a company can operate before needing new funds.
Encourages careful management of expenses.
Influences fundraising strategy and investor confidence.
High burn rate increases the risk of running out of cash.
Real-world examples
A startup spends $80,000 per month on salaries, rent, and marketing (gross burn rate). If it earns $20,000 in monthly revenue, its net burn rate is $60,000. With $600,000 in the bank, its runway is 10 months ($600,000 ÷ $60,000 per month).
Disclaimer: The information provided in this business glossary is for educational purposes only and should not be considered as financial advice. Always consult with qualified financial professionals before making investment decisions.
Get paid globally. Keep more of it.
No FX markups. No GST. Funds in 1 day.