Burn Rate
Burn rate measures how quickly a company is spending its available cash, expressed as a monthly figure; Net burn is calculated as total monthly cash outflows minus total monthly cash inflows (revenue received, not just invoiced); Controlling burn rate is the single most direct lever a founder has over their company's longevity
Burn rate measures how quickly a company is spending its available cash, expressed as a monthly figure. Gross burn is total monthly cash expenditure across all categories; net burn subtracts any revenue the business generates, reflecting the actual monthly cash drain. For pre-revenue or early-revenue startups, burn rate is a primary health metric that directly determines how much time the company has to reach profitability or the next funding milestone.
How it works
Net burn is calculated as total monthly cash outflows minus total monthly cash inflows (revenue received, not just invoiced). If a company spends $80,000/month and collects $20,000 in revenue, its net burn is $60,000/month. Founders track burn rate against their cash balance to calculate runway: dividing current cash by monthly net burn gives the number of months before the company runs out of money. Burn rate is monitored in cash-basis accounting, not accrual, because it reflects actual liquidity.
Key facts
- Gross vs. net burn: Gross burn ignores revenue; net burn is the operationally meaningful number for runway calculations.
- Typical targets: Many seed-stage companies target 18-24 months of runway at time of raise, implying a net burn rate calibrated to their funding amount.
- Burn multiple: A related metric, burn multiple = net burn / net new ARR, measures how much capital is being spent to generate each dollar of new recurring revenue.
For builders
Controlling burn rate is the single most direct lever a founder has over their company’s longevity. SaaS businesses with monthly subscription revenue have more predictable burn than ad-revenue publishers, since revenue is smoother and more forecastable. Founders should build burn rate dashboards that update automatically from their bank feeds and accounting software, rather than relying on end-of-month reconciliation, so they can spot anomalies (unexpected vendor charges, payroll errors) in real time.
Sources
- Y Combinator. SAFE (Simple Agreement for Future Equity) standard documents. ycombinator.com
- U.S. SEC. Exempt offerings and small-business capital raising. sec.gov
- National Venture Capital Association. Model legal documents. nvca.org
- Kauffman Foundation. Startup research and entrepreneurship data. kauffman.org
- Federal Reserve. Small Business Credit Survey. federalreserve.gov
