Burn rate is a metric that describes the speed at which a new company spends its available cash. In the early stages of a startup, expenses almost always exceed revenue. The company is operating at a loss. The burn rate quantifies exactly how big that loss is on a monthly basis.
It is the measure of negative cash flow.
For a founder, this number is not just an accounting statistic. It is the primary indicator of the company’s lifespan. If you have money in the bank and you are spending it to keep the lights on, you are burning capital. When the capital is gone, the business stops, unless you become profitable or raise more money.
Gross Burn versus Net Burn
#To understand this metric, you must distinguish between two types. There is often confusion here, so clarity is essential.
Gross Burn is the total amount of money the company spends in a month. This includes salaries, rent, server costs, and marketing spend. If you spend fifty thousand dollars in a month, your gross burn is fifty thousand.
Net Burn accounts for incoming revenue. It is the total amount of money the company loses in a month. If you spend fifty thousand dollars but bring in ten thousand dollars in sales, your net burn is forty thousand dollars.
Net burn is usually the more important figure for founders. It represents the actual amount by which your bank balance decreases every thirty days.
Calculating Your Runway
#The primary reason to track burn rate is to calculate your runway. Runway is the amount of time you have left before the company runs out of cash.
The math is straightforward. You divide your total cash on hand by your monthly net burn rate. The result is the number of months you have left to live.
If you have five hundred thousand dollars in the bank and a net burn of fifty thousand, you have ten months of runway. This timeline dictates every decision you make. It tells you when you need to start fundraising for the next round or when you must achieve profitability.
Strategic Implications
#A high burn rate is not inherently bad. It is a strategic lever.
In the venture capital model, a high burn rate often implies aggressive investment in growth. You are hiring engineers to build faster or spending on ads to acquire users. The theory is that spending heavily now will lead to massive scale later.
However, this introduces risk. If the growth does not materialize, you are left with high expenses and a shrinking bank account. A low burn rate implies conservation. It extends your runway and gives you more time to experiment, but it might mean you grow slower than your competitors.
Founders must constantly evaluate this trade off. Questions inevitably arise that do not have easy answers. Is the current spend actually resulting in growth? Are we burning cash on overhead that does not add value? Can we reduce the burn without killing momentum?
Managing burn rate is about managing time. It requires a realistic look at how long you can survive on the resources you currently possess.