What Is Burn Rate?
Burn rate is the rate at which a company spends cash beyond what it collects. It is the single number that tells you how long the current plan can run without new money.
Gross Burn vs. Net Burn
| Gross burn | Net burn | |
|---|---|---|
| Formula | Total monthly cash out | Monthly cash out minus monthly cash in |
| Answers | How expensive is the operation? | How fast is the bank balance falling? |
| Used for | Cost control and hiring decisions | Runway and fundraising timing |
| Watch out for | Annual prepayments distorting one month | Large one-off customer collections |
The Burn Rate Formula
Net burn = (starting cash minus ending cash) divided by number of months, excluding equity and debt proceeds.
A simple worked example: a company starts the quarter with $900,000 and ends with $720,000, with no financing in between. Net burn is $180,000 over three months, or $60,000 per month. At that rate, $720,000 in the bank is 12 months of runway. Our cash runway guide walks through the variants in more depth.
Why Burn Rate Gets Misread
Using the P&L instead of the bank
Accrual accounting is right for reporting but wrong for burn. Deferred revenue, unpaid bills and annual contracts all move cash and profit in different months. Burn is a cash measure. Pull it from bank activity, then reconcile it to your books.
Looking at one month
A single month is noisy. Use a trailing three-month average and look at the trend.
Ignoring committed spend
Signed hires, annual software renewals and inventory orders are future burn already decided. A 13-week cash flow forecast captures them before they hit.
What a Healthy Burn Looks Like
There is no universal "good" burn rate. What matters is whether burn buys growth you can measure, and whether runway leaves enough time to raise or reach breakeven. Investors increasingly look at burn multiple: net burn divided by net new recurring revenue in the same period. The lower it is, the more efficient each dollar of burn.
Bottom Line
Report gross burn, net burn and runway together every month, from cash. If those numbers take longer than a day to produce, that is a finance infrastructure problem our fractional CFO team fixes as part of standard reporting. For ways to bring burn down, read how to reduce cash burn without killing growth.
Want to see how this works in practice? Explore our FP&A services, see the industries we support, and read how an engagement with Finative works, from first call to monthly reporting.
Frequently Asked Questions
What is burn rate?
Burn rate is the amount of cash a company spends in excess of the cash it brings in, usually measured per month. It tells founders and investors how quickly the company is using its cash reserves.
What is the difference between gross burn and net burn?
Gross burn is total monthly cash outflow. Net burn is total monthly cash outflow minus monthly cash inflow from customers and other operating sources. Net burn is the figure used to calculate runway.
How do you calculate burn rate?
Take the starting cash balance for a period, subtract the ending cash balance, and divide by the number of months. Exclude new equity or debt proceeds so financing does not hide the true operating burn.
How does burn rate relate to runway?
Runway in months equals current cash divided by net burn. If net burn rises, runway shortens, which is why burn and runway should be reviewed together every month.