Definition
The burn rate is the pace at which a company uses up its cash reserves before it becomes cash-flow positive. Startups and early-stage firms use this metric to understand how long they can keep operating without new funding. Burn rate is usually stated as a monthly amount.
Key concepts (short)
– Gross burn: total cash outflows for operating purposes in a month (salaries, rent, hosting, marketing, etc.).
– Net burn: the company’s net monthly cash loss after accounting for cash inflows (sales). In simple terms: cash outflows minus cash inflows.
– Runway: how many months the company can continue at the current net burn before its cash balance hits zero. Runway = Cash on hand / Net burn.
How to calculate (formulas)
– Gross burn = Sum of monthly operating cash outflows.
– Net burn = Gross burn − (Monthly revenue − Cost of goods sold).
(Equivalently: Net burn = Cash outflows − Cash inflows.)
– Runway (months) = Cash on hand / Net burn.
Note: If net burn ≤ 0, you are not consuming cash and runway is not limited by burn.
Worked numeric examples
1) Simple runway example:
– Cash on hand = $1,000,000
– Monthly cash outflow = $100,000 (gross burn)
– Runway = 1,000,000 / 100,000 = 10 months
2) Technology startup example:
– Monthly operating expenses: office $5,000 + servers $10,000 + salaries $15,000 = Gross burn $30,000
– Monthly revenue = $20,000; Cost of goods sold (COGS) = $10,000 → Net revenue = $10,000
– Net burn = Gross burn − Net revenue = 30,000 − 10,000 = $20,000
– If cash on hand = $100,000 → Runway = 100,000 / 20,000 = 5 months
(If the company had zero revenue, runway would be 100,000 / 30,000 ≈ 3.3 months.)
What is a “good” burn rate?
There’s no universal “good” burn rate; it depends on stage, growth plans, sector, and investor expectations. A common practical rule is to target enough cash to cover 3–6 months of operating expenses. For example, with $100,000 in the bank:
– To have a 3-month runway the monthly burn must be about $33,333.
– For a 6-month runway the monthly burn must be about $16,667.
How burn rate affects strategy
– Short runway forces faster decisions about fundraising, cost cuts, or accelerating revenue.
– Longer runway gives time to iterate product, hire, and scale—but holding excess cash has opportunity costs
Measuring burn rate accurately
– Net burn (cash burn): the actual cash lost over a period. Formula (monthly net burn) = beginning cash balance − ending cash balance for the month. If multiple months, average over the period: average monthly net burn = (starting cash − ending cash) / number of months.
– Example: Beginning cash $250,000, ending cash after 3 months $160,000. Average monthly net burn = (250,000 − 160,000) / 3 = $30,000 per month.
– Gross burn (operating cash outflows): the total cash spent on operating activities each month (salaries, rent, marketing, suppliers), excluding cash inflows. Use when you want visibility into cost structure rather than net cash change.
– Example: Monthly payroll $40,000 + rent $5,000 + marketing $10,000 = gross burn $55,000.
– Revenue-adjusted burn: when a business has inflows, net burn = gross burn − cash revenue. Use this to calculate runway when revenue is nonzero.
Runway formulas and examples
– Basic runway (months) = Cash balance / Average monthly net burn.
– Example: Cash $120,000, average net burn $20,000 → runway = 120,000 / 20,000 = 6 months.
– If revenue reduces monthly burn, compute net burn first: net burn = monthly expenses − monthly cash revenue (if positive). If net burn ≤ 0, the business is cash-flow neutral or generating cash.
– Example: Expenses $50,000, cash revenue $35,000 → net burn = 15,000; with $90,000 cash → runway = 90,000 / 15,000 = 6 months.
– Use a trailing average (3–6 months) to smooth seasonality or one-off months: average monthly net burn = (sum of net burns over period) / months.
Step-by-step checklist to calculate and report burn rate
1. Choose period (monthly is common).
2. Start with cash-basis numbers (cash receipts and cash payments).
3. Exclude non-cash items (depreciation, amortization) from burn calculations.
4. Decide whether you want gross burn, net burn, or revenue-adjusted net burn.
5. Compute average over a rolling window (3 months recommended; 12 months for longer-term planning).
6. Calculate runway = current cash / average monthly net burn.
7. Document one-time items (severance, legal settlements) separately; show adjusted and unadjusted runway.
Practical ways founders and managers reduce burn (operational levers)
– Cut variable expenses: pause discretionary marketing, trim contractor hours, negotiate supplier prices.
– Revisit fixed costs: renegotiate rent/leases, move to flexible office plans, delay non-essential capital expenditures (capex).
– Adjust hiring: freeze hiring, delay new roles, shift to contractors or part-time where possible.
– Improve working capital: extend payables, shorten receivables, require advance payments or deposits.
– Increase cash inflows: accelerate sales, offer discounts for upfront payments, upsell existing customers.
– Financing options: bridge financing, venture capital, debt facilities, or convertible notes—each has trade-offs for dilution and covenants.
– Asset monetization: sell non-core assets or license IP where feasible.
Worked numeric example: effect of a cost cut
– Starting point: Cash $300,000; monthly expenses $80,000; monthly revenue $20,000 → net burn $60,000 → runway = 300,000 / 60,000 = 5 months.
– Action: Cut marketing by $20,000/month (immediate), reducing expenses to $60,000 → new net burn = 60,000 − 20,000 = 40,000 → runway = 300,000 / 40,000 = 7.5 months.
– Trade-off: evaluate impact on growth/revenue when cutting investments.
Limitations and common pitfalls
– Mixing cash and accrual accounting: burn
rate can be misstated if you mix cash-basis and accrual-basis numbers. If you measure expenses on a cash basis (actual payments) but report revenue on an accrual basis (recognized sales not yet collected), your calculated net burn will be misleading. Always use cash flows (actual receipts and disbursements) when computing burn and runway, or explicitly label the metric as an “accrual burn” if you must.
Other common pitfalls
– One‑time items treated as recurring. Large nonrecurring costs (legal settlements, restructuring charges, one‑off CAPEX) or one‑time inflows (grants, equity raises) can distort monthly burn if treated as ongoing. Exclude or separately show these when assessing runway.
– Ignoring timing and seasonality. Collections lags, seasonal demand, and monthly payroll cycles mean a flat “average” burn can hide near‑term shortages. Use short‑window rolling averages and cash‑flow forecasts by week or month.
– Failing to include committed liabilities. Signed leases, vendor contracts, and scheduled debt service are cash obligations. Excluding them understates future cash needs.
– Misclassifying financing as operating cash. Equity or debt proceeds increase bank balance but are not operating cash flow. Treat financing separately and avoid counting it as sustainable revenue when forecasting.
– Underestimating growth‑related spend. Cutting discretionary expenses may preserve runway but can reduce revenue growth; model the revenue impact of cuts before implementing them.
– Overreliance on headline runway. A runway number is a snapshot dependent on assumptions. Use scenarios and triggers rather than relying on a single month count.
Best practices and practical checklist
– Use cash flows. Compute burn from actual cash receipts and disbursements.
– Report both gross and net burn:
– Gross burn = total monthly cash outflows (operating expenses + payroll + rent + taxes).
– Net burn = gross burn − monthly cash inflows (operating receipts).
– Maintain a short‑term rolling forecast (13 weeks) and a medium‑term forecast (12 months) with weekly or monthly granularity.
– Separate recurring vs nonrecurring items. Show adjusted burn that strips one‑offs for a cleaner trend.
– Run at least three scenarios: base (most likely), downside (worse operational outcomes), and best case (faster growth or lower costs).
– Set explicit triggers and contingency plans. Example triggers: cash 12 months: monitoring mode — continue regular cadence and scenario planning.
– 12–6 months: prepare to raise capital and tighten non-essential spend; update 6– and 12‑month forecasts weekly.
– 6–3 months: active remediation — initiate fundraising, cut discretionary costs, accelerate receivables, and negotiate payables.
– ≤3 months: emergency mode — execute immediate cost reductions, secure bridge financing, prioritize cash-positive activities, and convene board/investors daily until stabilized.
Step-by-step playbook when runway drops into a tighter band
1. Reconcile and quantify (24–48 hours)
– Confirm bank balance, committed cash (escrows, restricted accounts), and all incoming wire schedules.
– Compute current gross burn = total cash outflows this period.
– Compute net burn = total cash outflows − cash inflows (same period).
– Recompute runway = available cash / monthly net burn (see formulas below).
2. Run three explicit scenarios (48–72 hours)
– Base-case: best estimate of receipts and outflows.
– Worse-case: e.g., receipts −25% to −50%, outflows at plan or trimmed.
– Best-case: receipts +10–20% and modest cost reductions.
– Produce month-by-month cash balances for 6–12 months and identify the month cash turns negative.
3. Prioritize cash actions (72 hours)
– Immediate (days): pause hiring, discretionary marketing, noncritical capex; accelerate collections; extend supplier terms.
– Near-term (1–3 weeks): renegotiate leases, seek vendor concessions, reduce contractor spend.
– Medium-term (weeks–months): restructure contracts, consider product/pricing changes that boost short-term cash.
4. Financing options and process (concurrent)
– Short bridges: bridge notes, convertible notes, venture debt (fast but dilutive/expensive).
– Equity: priced rounds (longer lead time, prepare investor pack).
– Alternatives: customer prepayments, factoring receivables, asset sales, strategic partnerships.
– Determine target raise using runway goal + contingency buffer (example below).
5. Communication and governance (immediate and ongoing)
– Notify board and lead investors with clear facts, scenarios, and proposed actions.
– Set a cadence for updates (e.g., twice weekly while critical).
– Prepare investor materials: 13‑week cash forecast, deck with use of funds, and milestones to reach by next funding.
Worked numeric examples
Formulas:
– Gross burn (monthly) = total cash outflows per month.
– Net burn (monthly) = cash outflows per month − cash inflows per month.
– Runway (months) = cash on hand / monthly net burn (if net burn > 0). If net burn ≤ 0, runway is effectively infinite until burn turns positive.
Example A — current status
– Cash on hand = $2,000,000
– Monthly cash inflows = $200,000
– Monthly cash outflows = $300,000
– Monthly net burn = 300,000 − 200,000 = $100,000
– Runway = 2,000,000 / 100,000 = 20 months
Example B — worse-case receipts drop 50%
– New inflows = $100,000; outflows unchanged = $300,000
– Net burn = 200,000
– Runway = 2,000,000 / 200,000 = 10 months
– Action: move from monitoring to fundraising preparation.
Example C — emergency fundraising ask
– Current cash = $500,000; monthly net burn = $150,000; current runway = 3.33 months.
– Target runway = 12 months → required cash = 12 * 150,000 = $1,800,000.
– Additional needed = 1,800,000 − 500,000 = $1,300,000.
– Add contingency buffer (e.g., 20%): ask ≈ 1,300,000 * 1.2 = $1,560,000.
Checklist to prepare for a financing outreach (minimum items)
– Rolling 13‑week cash flow by week and scenario drivers.
– 12–24 month P&L and cash flow forecast with key assumptions disclosed.
– Cap table and proposed post‑money structure.
– Use‑of‑funds schedule tied to milestones and runway.
– KPI