Burn rate: what it is and how to calculate a startup's cash burn

Burn rate is how much money a company loses per period. There are two kinds:

• gross — all costs for the month;
• net — costs minus revenue. When people just say "burn", they usually mean this one.

net burn = monthly costs − monthly revenue

Example. Salaries are $30,000, ads $7,500, servers and tools $2,500, rent $5,000. Gross burn is $45,000. Revenue is $20,000, so net burn is $25,000 a month.

What follows from it

If there's $150,000 in the bank, it lasts $150,000 ÷ $25,000 = 6 months. That is the runway.

It's also useful to check what growth costs you. To do that, divide the month's net burn by how much annual recurring revenue grew that month. Say it grew by $1,750 × 12 = $21,000. Then $25,000 ÷ $21,000 ≈ 1.2: the company burns $1.20 for every dollar of growth. Below 1, growth is cheap. Above 2 is a reason to find out where the money goes.

Common mistakes

• Judging by a single month. Annual payments, bonuses and one-off purchases distort it a lot. A three-month average is better.
• Forgetting decisions already made. If two new hires start next month, burn will go up even though the report doesn't show it yet.
• Confusing burn with an accounting loss. Burn is counted by the movement of cash, not by the paperwork.

In Runway 200

The "burning" line is costs minus revenue for the week. If revenue is higher than costs, it says "in profit" instead. Runway in the game is counted in weeks from the current burn.

To work out how long your own money will last — runway calculator.

More in the glossary: CAC · Cohort · LTV · MRR and ARR · Product-market fit · all terms