Burn Rate

Also known as: Monthly BurnCash BurnCash Burn RateNet BurnGross Burn

Net Burn Rate = Monthly Expenses − Monthly Revenue

💡The Concept

Burn rate is the speed at which your company spends cash reserves before generating positive cash flow. Gross burn is total monthly spending; net burn is spending minus revenue. A startup with $50K/month expenses and $20K/month revenue has a $30K net burn rate and needs $30K from savings every month to survive. VCs use burn rate to calculate runway and assess financial discipline — a startup burning $200K/month with $10K MRR will be scrutinized much harder than one burning $200K with $150K MRR.

⚠️The Trap

The trap is tracking burn rate from your P&L instead of your bank account. Accrual accounting can show $50K net burn while your bank is actually losing $80K/month because of delayed client payments (accounts receivable), prepaid annual subscriptions expiring, and vendor invoices coming due simultaneously. Many founders have been shocked to discover their 'calculated' 12-month runway was actually 6 months when measured by actual cash in the bank.

🎯The Action

Calculate both metrics and track them separately: Gross Burn = Total Cash Out per Month. Net Burn = Cash Out − Cash In. Then compute Runway = Cash Balance ÷ Net Burn. Set alerts: if runway drops below 6 months, initiate cost cuts or fundraising immediately. Review burn rate weekly (not monthly) — cash surprises kill more startups than bad products.

⚡Pro Tips

Create a 'burn rate by department' view: Engineering, Sales, Marketing, G&A. This reveals which team is consuming the most cash relative to their output. Many startups discover marketing is burning 40% of cash but generating only 15% of pipeline.

Track 'burn multiple' = Net Burn ÷ Net New ARR. A burn multiple under 1.5x means you're spending efficiently on growth. Above 3x means you're burning more than the business justifies.

Always model three scenarios: Best Case (aggressive growth assumptions), Base Case (current trajectory), and Worst Case (revenue drops 20%). Manage cash to survive the worst case while planning for the base case.

🚫Common Myths

✗Myth: “Lower burn rate is always better”

✓Reality: A startup burning $10K/month and growing 2%/month will be outcompeted by one burning $50K/month and growing 20%/month. Context matters — underspending can be worse than overspending if it means losing market opportunity. VCs fund high-burn companies IF the burn is driving efficient growth.

✗Myth: “Fundraising should happen when you're about to run out of cash”

✓Reality: Fundraising typically takes 3-6 months. If you start at 6 months runway, you'll be at zero before the wire hits. Begin fundraising at 9-12 months of runway minimum. The best time to raise is when you DON'T need money — leverage comes from optionality.