What is Burn Rate?

Burn rate is the rate at which a company spends its available capital or cash reserves to cover operating expenses, typically expressed monthly. It's a critical metric for startups and businesses that are not yet profitable, as it indicates how long the company can operate before needing to raise more funds or become cash flow positive.

Types:

  • Gross Burn: Total monthly operating expenses

  • Net Burn: Monthly operating losses (expenses minus revenue)

Formula:

Net Burn Rate = Cash Outflows – Cash Inflows (per month) Runway = Cash on Hand / Net Burn Rate

Example:

If a startup spends $200,000 per month and generates $50,000 in revenue, its net burn rate is $150,000. If it has $1.5M in cash, it has a runway of 10 months.

Why It’s Crucial:

  • Helps founders understand their funding timeline

  • Key metric used by VCs to assess risk and urgency of capital needs

  • Encourages smarter financial decisions and operational efficiency

  • Determines how aggressively a startup can pursue growth without sacrificing sustainability