Burn rate

Before you rely on it

What to check

Use net burn, cash out less cash in, and check whether a one-off item is distorting the month you happened to measure.

The common error

Where people go wrong with burn rate

Averaging in a month with an annual insurance premium or a tax payment in it. The number comes out high, the runway comes out short, and decisions get made against a deadline that was never real.

Worked through

Burn rate in plain numbers

A start-up holds $600,000 in cash. It spends $80,000 a month and earns $30,000 in revenue. Gross burn, the total monthly spending, is $80,000. Net burn, spending minus income, is $50,000. Divide the cash by net burn and runway is 12 months. If revenue grows to $40,000 the net burn falls to $40,000 and runway stretches to 15 months. If the company hires two people at a combined $16,000 a month, net burn rises to $66,000 and runway shrinks to about 9 months; the same cash tells three different stories depending on the assumptions.

Easily confused

Burn rate and its neighbours

Burn rate is not profit or loss, and it is not cash flow in the strict sense; a company can show an accounting loss with a small burn if most expenses are non-cash, or a small loss with a large burn if it is paying down payables. Gross burn and net burn answer different questions: one shows the cost base, the other shows how fast cash actually disappears. Burn multiple compares net burn with new revenue added, and it is used to judge how efficiently a company is growing.

In real decisions

Where burn rate turns up

Founders track burn monthly to decide when to raise money, cut costs or hire; investors ask for it, along with runway, to judge risk. Boards set limits on it and review it against plan. When markets tighten, teams often aim to lengthen runway by lowering burn; it also drives negotiation: a company with only three months of cash has less bargaining power than one with eighteen. Good operators update the figure whenever a major cost or contract changes.

Know the edges

Where burn rate stops being reliable

Burn is backward-looking, and runway assumes today's pace continues. Seasonal revenue, delayed customer payments, annual prepayments and one-time costs can distort a single month; a three-month average is often more reliable. It also ignores what the spending buys: a high burn that builds a durable business can be reasonable, and a low burn on a business that is not working is not safe; use it together with growth, margins and the plan for reaching sustainability.

Quick answers

What people ask about burn rate

What is a healthy burn rate? It depends on stage and plan. A common yardstick is to keep at least twelve to eighteen months of runway, and to link spending to milestones that raise the next round or reach profitability. Lower is not always better if growth stalls.

Should burn be measured monthly or quarterly? Track it monthly and smooth it over three months. Single months swing with annual payments and timing of collections.