Burn Rate
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Burn rate refers to the speed at which a company spends its cash reserves before it starts generating positive cash flow. It is most commonly used in the context of startups and early-stage companies that are operating at a loss while investing in growth. Burn rate is typically expressed as a monthly figure.
In depth
There are two types of burn rate: gross burn, which is the total amount of cash a company spends each month, and net burn, which is gross burn minus any revenue coming in. Net burn is the more critical figure because it reflects the actual rate at which cash reserves are being depleted. Dividing total available cash by the monthly net burn rate gives the company's runway — the number of months it can continue operating before running out of money.
Burn rate is one of the most closely watched metrics by startup founders and investors alike. A high burn rate isn't inherently problematic if the company is growing rapidly and deploying capital efficiently, but it becomes a serious concern when growth doesn't justify the spend. Managing burn rate requires balancing aggressive investment in growth with the discipline to extend runway long enough to reach the next funding milestone or profitability — a miscalculation here is one of the most common reasons early-stage startups fail.
Example
Let's consider a real-world example of a SaaS startup calculating its burn rate.
Monthly operating expenses: $30,000
Monthly revenue: $10,000
Gross Burn = $30,000/month
Net Burn = $30,000 - $10,000 = $20,000/month
Available cash: $120,000
The startup is spending $30,000 each month in total expenses (gross burn), but after accounting for $10,000 in monthly revenue, it is losing $20,000 per month (net burn).