Burn rate

What is burn rate?

Burn rate is how fast cash leaves your bank account, expressed as a monthly figure. It is a cash measure, not an accounting one, which is why it can differ sharply from your profit and loss statement. Money spent on a year of hosting paid upfront hits your burn this month even if accounting spreads it across twelve.

Founders use two versions and mixing them up causes real confusion. Gross burn is total monthly cash out, ignoring revenue. Net burn subtracts cash coming in, so it shows how much the account actually shrinks. Net burn is the number that determines how long you survive; gross burn shows what your operation costs regardless of sales.

When revenue exceeds spending, net burn turns negative and you are cash flow positive. At that point the clock stops, which is the single biggest change in a startup's life.

How to calculate burn rate

Gross burn = total cash spent in a month

Net burn = total cash spent in a month minus cash collected in that month

Say you run a four person team. Monthly costs are $32,000 in salaries and contractors, $2,400 in hosting and software, $1,600 in rent, and $4,000 in ads, so gross burn is $40,000. You collected $17,500 from customers, which makes net burn $40,000 minus $17,500 = $22,500 per month.

With $270,000 in the bank, your runway is $270,000 / $22,500 = 12 months. Recalculate whenever anything meaningful changes, and use a three month average rather than a single month, since annual invoices and one-off purchases distort any individual month.

Why burn rate matters for startups

Burn rate turns every decision into the same question: how many weeks of life does this cost? A $6,000 per month hire on a $22,500 burn does not just add an expense, it cuts a twelve month runway to roughly nine. Framing spending in months rather than dollars makes tradeoffs concrete for a small team.

It also drives timing. Fundraising typically takes months, and starting the conversation with three months of cash left puts you in the weakest possible negotiating position. Knowing your burn tells you when to start, when to cut, and whether the next milestone is reachable with the money you have.

Burn rate in practice

Imagine a three person team with $180,000 in the bank, gross burn of $28,000, and $8,000 in monthly recurring revenue. Net burn is $20,000 and runway is 9 months. They set a target: reach $28,000 in monthly revenue before the cash runs out. Instead of raising, they cancel $1,900 of unused tools, pause paid ads that were not converting, and raise prices for new customers. Gross burn drops to $24,500 and revenue climbs to $12,000, so net burn falls to $12,500 and runway stretches past 14 months. Nothing dramatic happened; they simply bought seven months of time.

Benchmarks and rules of thumb

Honest guidance here is about ratios, not absolute dollars. A widely repeated rule is to raise enough capital for 18 to 24 months of runway, on the reasoning that reaching the next meaningful milestone plus running a fundraise takes longer than founders expect. Below roughly six months of runway, most investors will read the situation as distressed, so treat that as a floor for starting a raise rather than a normal operating state. Many investors also look at how much cash you burned to add a dollar of recurring revenue, which is expected to improve as the company matures.

Common mistakes

• Quoting gross burn when net burn matters. If you have revenue, the survival number is net. Be clear which one you are reporting.
• Averaging away lumpy costs. Annual contracts, tax payments, and payroll taxes arrive in bursts. Model the actual calendar, not a smooth line.
• Cutting marketing first. It is the easiest line to cut and often the one generating the revenue you need. Cut unused tools and underused headcount before demand generation.
• Ignoring payment timing. Signed contracts are not cash. Customers who pay in 60 days do not lower this month's burn.
• Raising burn immediately after a raise. New money makes the account look infinite. Increase spending in steps tied to results.

Related concepts

Burn rate is the denominator under runway, and both sit inside the broader picture of cash flow. A bootstrapped company keeps net burn near zero by definition, while a company that has taken venture capital is expected to burn deliberately in exchange for speed.