Burn Rate

Burn Rate Explainer

Burn rate describes how quickly a business is using cash, especially when its cash outflows exceed the cash it generates. Early-stage companies often track it monthly because they may invest in people, product development, and customer acquisition before operations become self-supporting. Gross burn usually refers to total cash spending in a period, while net burn subtracts cash inflows from that spending.

Suppose a startup begins with $1.2 million in available cash. During a month it pays $200,000 and receives $80,000 from customers. Gross burn is $200,000 and net burn is $120,000. Dividing the starting cash by the current net burn suggests roughly ten months of runway. That estimate is useful for planning, but it assumes the cash balance and monthly burn stay otherwise unchanged.

Burn can rise when a company hires, buys equipment, builds inventory, or runs a major launch. It can fall when revenue grows, collections improve, discretionary spending is reduced, or one-time expenses pass. Managers often build a schedule that separates recurring commitments from temporary items, then model how planned hiring, sales growth, financing, and payment timing could change the monthly pattern.

Burn rate is not the same as accounting loss. Noncash expenses can reduce reported earnings without using current cash, while loan principal, inventory, or capital spending can use cash without appearing fully in current profit. Runway can also be shorter than the simple calculation if some cash is restricted or bills are due unevenly. Treat burn and runway as rolling planning measures, update them with actual cash movements, and test cautious scenarios before commitments become difficult to reverse.