Burn Rate
Burn rate is the speed at which a company spends its cash reserves, typically measured monthly. It's most commonly used by startups and pre-revenue businesses to understand how long their funding will last before they need to become profitable or raise more capital.
Burn Rate Definition
Burn rate is the speed at which a company spends its cash reserves, typically measured monthly. It's most commonly used by startups and pre-revenue businesses to understand how long their funding will last before they need to become profitable or raise more capital.
Burn Rate in Practice — Example
A SaaS startup raises $600,000 in seed funding. They spend $50,000/month on salaries, office space, and software tools, and bring in $10,000/month in early revenue. Their gross burn rate is $50,000/month, and their net burn rate is $40,000/month. At that net rate, they have 15 months of runway before the money runs out — meaning they need to hit profitability or raise their next round before then.
Why Burn Rate Matters for Your Business
Burn rate is your financial clock. It tells you exactly how much time you have to make your business work before you run out of cash. For startups, this number drives every major decision — when to hire, when to cut costs, and when to start fundraising.
Even established businesses should track burn rate during periods of heavy investment or expansion. If you're opening a new location, launching a new product line, or scaling your team, you're likely spending more than you're earning temporarily. Knowing your burn rate keeps you from accidentally running dry.
Investors pay close attention to burn rate too. A high burn rate isn't necessarily bad — it might mean you're investing aggressively in growth. But a high burn rate with no clear path to revenue is a red flag.
How Burn Rate Works
There are two types:
Runway calculation:
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Runway (months) = Cash on Hand ÷ Net Burn Rate
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Example: $300,000 cash ÷ $25,000 net burn = 12 months of runway.
| Burn Rate Level | What It Means |
|---|---|
| Low burn | Conservative spending, longer runway |
| Moderate burn | Balanced growth investment |
| High burn | Aggressive scaling, shorter runway |
Burn Rate vs Runway
Burn rate is how fast you're spending money. Runway is how long your money will last at that rate. They're two sides of the same coin — burn rate is the speed, runway is the distance. You need both numbers to make informed decisions about spending and fundraising.
FAQ
Q: What's a "good" burn rate for a startup?
A: There's no universal answer, but most investors like to see at least 12-18 months of runway. If your burn rate leaves you with less than 6 months, it's time to either cut costs or raise capital.
Q: How do I reduce my burn rate?
A: Start with the biggest line items — usually payroll and rent. Renegotiate contracts, delay non-essential hires, switch to cheaper tools, and cut marketing spend that isn't converting.
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