Understanding Burn Rate
Burn rate is how fast your company is spending cash. It's one of the most important metrics for startups and any business not yet profitable. Understanding your burn rate tells you how long you can survive before needing more funding or reaching profitability.
Gross vs Net Burn Rate
Gross Burn Rate
Gross Burn = Total Monthly Expenses
All money going out each month
Gross burn tells you the total cash flowing out, regardless of revenue. It's useful for understanding your full cost structure.
Net Burn Rate
Net Burn = Total Expenses - Monthly Revenue
Actual monthly cash decrease
Net burn is what really matters — it's how much your cash position decreases each month. A negative net burn means you're cash flow positive!
| Metric | Example | Meaning |
|---|---|---|
| Gross Burn | $50,000/mo | Total spending |
| Revenue | $20,000/mo | Income |
| Net Burn | $30,000/mo | Actual cash drain |
Calculating Runway
Runway (months) = Current Cash ÷ Net Burn Rate
How long until you run out of money
Example
Runway Is Not a Deadline
Healthy Burn Rate Guidelines
| Runway | Status | Action Needed |
|---|---|---|
| < 6 months | 🚨 Critical | Immediate action: cut costs or raise now |
| 6-12 months | ⚠️ Warning | Start fundraising or accelerate revenue |
| 12-18 months | ✅ Healthy | Good position, focus on growth |
| 18+ months | 🚀 Strong | Well-funded, can take more risks |
The 18-Month Rule
Managing Your Burn Rate
Reducing Burn
- Delay non-essential hires
- Negotiate payment terms with vendors
- Reduce marketing spend with poor ROI
- Switch to cheaper software alternatives
- Consider remote work to reduce office costs
- Cut unnecessary perks and expenses
Increasing Revenue
- Focus on closing existing pipeline faster
- Increase prices if market allows
- Launch quick-win products or services
- Focus on upselling existing customers
- Improve sales team efficiency
Don't Cut Too Deep
When to Increase Burn
Sometimes spending more is the right move:
- Product-market fit is proven and growth is accelerating
- You just raised funding specifically for growth
- Clear ROI on marketing or sales spend
- Hiring key roles that unlock significant revenue
- Competitors are gaining ground
Growth Mode vs Survival Mode
Common Expense Categories
| Category | Typical % | Notes |
|---|---|---|
| Salaries & Benefits | 50-70% | Largest expense for most startups |
| Rent & Facilities | 5-15% | Can reduce with remote work |
| Marketing | 10-30% | Varies widely by stage and model |
| Software & Tools | 3-8% | SaaS costs add up quickly |
| Legal & Professional | 2-5% | Higher in early stage |
| Other/Misc | 5-10% | Travel, supplies, etc. |
Burn Rate by Stage
| Stage | Typical Monthly Burn | Focus |
|---|---|---|
| Pre-seed | $10k-$30k | Very lean, proving concept |
| Seed | $30k-$100k | Building product, early customers |
| Series A | $100k-$300k | Scaling sales and team |
| Series B+ | $300k-$1M+ | Rapid growth and expansion |
Very rough benchmarks — varies significantly by industry
Frequently Asked Questions
Q: What's a good burn rate?
A: There's no universal answer. A burn rate that gives you 18+ months runway is generally considered healthy. More important is whether spending is efficient and leading to growth.
Q: How do investors view burn rate?
A: Investors want to see efficient spending that leads to growth. High burn with fast growth can be good. High burn with slow growth is a red flag. They'll calculate runway and expected milestones.
Q: Should I include founder salaries in burn?
A: Yes. Include all real expenses. If founders are taking reduced salaries, that may artificially lower your burn and you should plan for increases later.
Q: How often should I check burn rate?
A: Review monthly at minimum. Track trends over time. Sudden increases or decreases deserve investigation.
Q: What if my net burn is negative (making money)?
A: Congratulations! You're cash flow positive. This is the goal. You have infinite runway and can reinvest profits into growth or save for uncertain times.
Q: How do I project future burn?
A: Start with current expenses, add planned hires and investments, subtract expected revenue. Be conservative on revenue and generous on expenses.
Monitoring Best Practices
- Track burn rate weekly or monthly
- Categorize expenses to identify trends
- Project runway 12-24 months out
- Set alerts for unexpected expense spikes
- Compare actual vs budgeted spending
- Review with team regularly to maintain awareness
Burn rate calculations are estimates based on current data. Actual runway depends on many factors including revenue variability, unexpected expenses, and market conditions. Regularly update projections as circumstances change.