Burn Rate: What It Is, 2 Types, Formula, and Examples

Burn rate is a financial metric that measures the rate at which a company spends its available cash over a specific period, typically a month. It reflects how quickly a business is “burning through” its cash reserves, often before it becomes profitable or generates sufficient revenue to cover expenses. Burn rate is most commonly associated with startups, particularly those in early stages, where venture capital or seed funding is used to fuel growth before achieving profitability.

The term originates from the idea that cash is like fuel in a fire—once it’s gone, the fire (or business) goes out unless more fuel (funding) is added. Burn rate helps businesses and investors assess financial health, sustainability, and the runway—the amount of time a company can operate before running out of cash.

Burn rate is not inherently negative. Spending cash to grow, hire talent, develop products, or acquire customers is often necessary for startups. However, an excessively high burn rate without a clear path to profitability can signal trouble. Conversely, a low burn rate may indicate cautious spending but could also suggest missed opportunities for growth.

Why Burn Rate Matters

Burn rate is a vital indicator for several stakeholders:

Entrepreneurs and Founders: Understanding burn rate helps founders manage cash flow, prioritize spending, and determine when to seek additional funding.
Investors: Venture capitalists and angel investors use burn rate to evaluate whether a startup is spending wisely and how long it can operate without new capital.
Financial Analysts: Burn rate provides insight into a company’s operational efficiency and long-term viability.

By monitoring burn rate, businesses can make informed decisions about budgeting, scaling, and fundraising. It also serves as a reality check, ensuring companies don’t overspend in pursuit of growth at the expense of sustainability.

The Two Types of Burn Rate

Burn rate is typically categorized into two types: gross burn rate and net burn rate. Each offers a different perspective on a company’s cash flow dynamics.

1. Gross Burn Rate

Gross burn rate measures the total amount of cash a company spends in a given period, usually a month, regardless of any incoming revenue. It includes all operating expenses, such as salaries, rent, marketing, research and development, and other overhead costs.

Key Characteristics:

Focuses solely on cash outflows.
Does not account for revenue or other cash inflows.
Provides a raw picture of a company’s spending habits.

When to Use: Gross burn rate is useful for understanding the full scope of a company’s expenses, particularly in early-stage startups with little to no revenue. It helps identify areas where spending could be optimized.

Example: A tech startup spends $100,000 per month on salaries, $20,000 on office rent, $15,000 on marketing, and $10,000 on software subscriptions. Its gross burn rate is $145,000 per month.

2. Net Burn Rate

Net burn rate measures the difference between cash outflows (expenses) and cash inflows (revenue or other income) over a specific period. It reflects the actual rate at which a company’s cash reserves are depleting after accounting for money coming in.

Key Characteristics:

Accounts for both cash outflows and inflows.
Indicates whether a company is moving toward profitability or still losing money.
A negative net burn rate (where inflows exceed outflows) suggests a company is cash-flow positive.

When to Use: Net burn rate is critical for assessing a company’s runway and sustainability. It’s especially relevant for startups generating some revenue but still operating at a loss.

Example: The same tech startup with a gross burn rate of $145,000 per month generates $50,000 in monthly revenue from product sales. Its net burn rate is $145,000 – $50,000 = $95,000 per month.

Understanding both types of burn rate provides a holistic view of a company’s financial health. Gross burn rate highlights spending patterns, while net burn rate shows how revenue impacts cash depletion.

Burn Rate Formula

Calculating burn rate is straightforward, but the formula varies slightly depending on whether you’re calculating gross or net burn rate. Below are the formulas for each:

Gross Burn Rate Formula

Gross Burn Rate=Total Monthly ExpensesTime Period (usually 1 month)\text{Gross Burn Rate} = \frac{\text{Total Monthly Expenses}}{\text{Time Period (usually 1 month)}}Gross Burn Rate=Time Period (usually 1 month)Total Monthly Expenses

Since gross burn rate focuses solely on expenses, you simply sum all cash outflows for the period. The result is typically expressed as a monthly figure, even if calculated over a longer period.

Net Burn Rate Formula

Net Burn Rate=Total Monthly Expenses−Total Monthly RevenueTime Period (usually 1 month)\text{Net Burn Rate} = \frac{\text{Total Monthly Expenses} – \text{Total Monthly Revenue}}{\text{Time Period (usually 1 month)}}Net Burn Rate=Time Period (usually 1 month)Total Monthly Expenses−Total Monthly Revenue

Net burn rate subtracts revenue (or other cash inflows) from expenses to show the net cash loss per month.

Runway Formula

Burn rate is closely tied to a company’s runway, the amount of time it can operate before running out of cash. The runway formula is:Runway (in months)=Total Cash ReservesNet Burn Rate\text{Runway (in months)} = \frac{\text{Total Cash Reserves}}{\text{Net Burn Rate}}Runway (in months)=Net Burn RateTotal Cash Reserves

Runway is a critical metric for startups, as it signals when additional funding or revenue is needed to avoid insolvency.

How to Calculate Burn Rate: A Step-by-Step Guide

To illustrate how to calculate burn rate, let’s walk through the process for both types using a hypothetical startup.

Step 1: Gather Financial Data

Total monthly expenses: Include all cash outflows, such as payroll, rent, utilities, marketing, software, and legal fees.
Total monthly revenue: Include all cash inflows, such as sales, subscriptions, or investment income.
Cash reserves: Determine the total cash available in the company’s bank accounts.

Step 2: Calculate Gross Burn Rate Add up all monthly expenses. For example:

Salaries: $80,000
Rent: $15,000
Marketing: $20,000
Software: $10,000
Miscellaneous: $5,000
Total Expenses: $130,000

Gross Burn Rate = $130,000 per month

Step 3: Calculate Net Burn Rate Subtract monthly revenue from total expenses. For example:

Total Expenses: $130,000
Monthly Revenue: $40,000
Net Burn Rate = $130,000 – $40,000 = $90,000 per month

Step 4: Calculate Runway Divide cash reserves by net burn rate. For example:

Cash Reserves: $1,080,000
Net Burn Rate: $90,000
Runway = $1,080,000 ÷ $90,000 = 12 months

This startup has 12 months to either reduce its burn rate, increase revenue, or raise additional capital before running out of cash.

Real-World Examples of Burn Rate

To bring the concept to life, let’s explore two hypothetical examples of companies with different burn rates and financial strategies.

Example 1: Tech Startup “CloudVision”

Background: CloudVision is a SaaS startup developing AI-powered cloud storage solutions. It raised $2 million in seed funding and is pre-revenue, focusing on product development and marketing.

Financial Snapshot:

Monthly Expenses:
- Salaries (10 employees): $100,000
- Office Rent: $10,000
- Cloud Infrastructure: $15,000
- Marketing: $25,000
- Miscellaneous: $5,000
- Total Expenses: $155,000
Monthly Revenue: $0 (pre-revenue)
Cash Reserves: $1.8 million (after initial setup costs)

Calculations:

Gross Burn Rate: $155,000 per month
Net Burn Rate: $155,000 – $0 = $155,000 per month
Runway: $1,800,000 ÷ $155,000 ≈ 11.6 months

Analysis: CloudVision’s high burn rate reflects heavy investment in talent and infrastructure to build its product. With no revenue, its net and gross burn rates are identical. The 11.6-month runway suggests the company must either launch its product and generate revenue or secure additional funding within a year. To extend its runway, CloudVision could reduce marketing spend or negotiate lower cloud costs.

Example 2: E-Commerce Startup “TrendyThreads”

Background: TrendyThreads is an online clothing retailer that raised $500,000 in angel funding. It’s generating revenue but still operating at a loss as it scales.

Financial Snapshot:

Monthly Expenses:
- Inventory: $30,000
- Salaries (5 employees): $25,000
- Warehousing: $10,000
- Marketing: $15,000
- Website Hosting: $5,000
- Total Expenses: $85,000
Monthly Revenue: $50,000
Cash Reserves: $400,000

Calculations:

Gross Burn Rate: $85,000 per month
Net Burn Rate: $85,000 – $50,000 = $35,000 per month
Runway: $400,000 ÷ $35,000 ≈ 11.4 months

Analysis: TrendyThreads’ revenue offsets some of its expenses, resulting in a lower net burn rate than gross burn rate. Its runway is similar to CloudVision’s, but the company is closer to profitability. To improve its financial position, TrendyThreads could focus on increasing sales through targeted marketing or reducing inventory costs.

Strategies to Manage Burn Rate

A high burn rate isn’t necessarily a death sentence, but it requires careful management. Here are strategies to optimize burn rate:

Prioritize Spending: Focus on high-impact areas like product development and customer acquisition while cutting non-essential costs.
Increase Revenue: Launch products sooner, upsell existing customers, or explore new revenue streams.
Extend Runway: Negotiate better vendor terms, reduce overhead, or pause hiring to conserve cash.
Raise Capital: Secure additional funding before cash reserves run low, using burn rate data to demonstrate financial discipline to investors.
Monitor Regularly: Track burn rate monthly to catch trends early and adjust strategies as needed.

Common Burn Rate Mistakes

Startups often fall into traps that inflate burn rate unnecessarily:

Over-Hiring: Scaling the team too quickly can drain cash reserves.
Excessive Marketing Spend: Overspending on unproven channels may yield low returns.
Ignoring Revenue: Focusing solely on growth metrics like user acquisition without monetization can shorten runway.
Lack of Forecasting: Failing to project burn rate and runway leaves companies unprepared for cash shortages.

Burn Rate in Context: Industry Trends

Burn rate varies by industry and business model. For example:

Tech Startups: High burn rates are common due to R&D and talent costs, but investors often tolerate this for high-growth potential.
E-Commerce: Lower burn rates are typical, as revenue comes faster, but inventory and logistics can drive costs.
Biotech: Extremely high burn rates reflect long R&D cycles before revenue, requiring patient capital.

In 2025, macroeconomic factors like rising interest rates and cautious venture capital markets have heightened scrutiny on burn rate. Investors are prioritizing startups with lean operations and clear paths to profitability, making burn rate management more critical than ever.

Conclusion

Burn rate is a fundamental metric that encapsulates a company’s financial discipline and growth strategy. By understanding gross and net burn rates, using simple formulas to calculate them, and analyzing real-world examples, businesses can make informed decisions to extend their runway and achieve sustainability. Whether you’re a founder navigating the startup landscape or an investor evaluating opportunities, mastering burn rate is key to unlocking long-term success.