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Cash flow can make or break a business. In fact, 82% of businesses fail due to poor cash flow management.
To avoid becoming part of that statistic, you need to know your burn rate, how fast you're spending cash, and how long you can keep going at that pace. In this post, we’ll walk through what burn rate really means, how to calculate it, and how to use it to make smarter business decisions.
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What is Burn Rate?
Burn rate measures how quickly your company is spending its available cash. It’s a negative cash flow metric, essentially showing how fast money is flowing out of your business.
This is especially important for early-stage startups and subscription-based businesses, where expenses often exceed revenue for quite some time. Tracking your burn rate regularly helps you stay ahead of potential cash flow issues. If your costs keep rising without a corresponding increase in revenue, you risk running out of money before you’ve found product-market fit or secured your next funding round.
What is the Formula for Calculating Burn Rate?
There are two types of burn rate to know: gross burn rate and net burn rate.
Gross burn rate refers to the total amount of cash your company is spending each month, without considering any incoming revenue. It’s a straightforward look at your monthly expenses and can help you monitor how spending changes over time.
Gross Burn = Total Monthly Expenses
Net burn rate, on the other hand, takes revenue into account. It's calculated by subtracting your total revenue from your total expenses. In other words, it tells you how much money you’re actually losing each month. This number is often used to calculate runway, how long you can keep operating before your cash runs out.
Net Burn = Total Expenses – Total Revenue
| Type | Formula | What it Tells You |
|---|---|---|
| Gross Burn | Total Monthly Expenses | How much you’re spending, regardless of revenue |
| Net Burn | Total Monthly Expenses - Total Revenue | How much you are losing after accounting for income |
Both metrics are important. Gross burn helps you spot spikes in spending, while net burn gives you a clearer picture of overall financial sustainability.
Burn Rate Example
Let’s say your numbers this month look like this:
-
Expenses: $80,000
-
Revenue: $50,000
-
Cash in the bank: $750,000
Your gross burn is $80,000.
Your net burn is $30,000.
Your runway = $750,000 ÷ $30,000 = 25 months
So, you’re losing $30K/month, and at this rate, you’ve got 25 months before hitting $0.
💡 Want help calculating runway automatically?
Use Barmetrics Forecasting to simulate burn scenarios and understand how spending, revenue, or funding changes impact your runway.
Run Rate vs. Burn Rate: What’s the Difference?
These two metrics often get confused—but they serve very different purposes.
Burn Rate
Burn rate is a measure of how quickly you're spending cash; it reflects your financial risk. How long can your business keep operating if nothing changes?
You’ll often hear this talked about in terms of runway:
“We’re burning $50K per month, and we’ve got $600K in the bank—so we’ve got 12 months of runway.”
If your burn rate is increasing but your revenue isn’t, that’s a warning sign that you may need to course-correct or raise funds soon.
Run Rate
Run rate, on the other hand, is a projection of future revenue based on current performance. It’s typically calculated by taking your most recent month or quarter of revenue and extrapolating it over a year.
Run rate formula:Run Rate = Revenue for period × 12 (if using monthly data)
You’ll often hear this talked about in pitches to investors:
“We’re currently at a $2M run rate…”
The key difference is that burn rate helps you understand your runway and spending habits, while run rate is used to estimate future growth potential. If burn rate shows how long you can last, run rate shows what you might achieve, assuming things continue at their current pace.
In short:
Burn rate is about survival.
Run rate is about potential.
Why Burn Rate Matters
Understanding your burn rate is essential for managing cash flow, planning your next moves, and preparing for conversations with investors. While it’s normal for businesses—especially startups—to have a negative burn rate early on, that doesn’t mean it should be ignored. If your burn rate is too high, you might find yourself running out of cash before hitting key milestones.
Tracking burn rate also helps you forecast when you’ll need to raise money or tighten spending. If you're regularly checking your burn rate, you can catch issues before they become crises and adjust accordingly.
From an investor’s perspective, burn rate is a key indicator of how efficiently you're running your business. It tells them how quickly their money will be spent—and how much time you'll have to generate meaningful results before needing more capital.
What Investors Consider
Most investors expect startups to keep at least 12 months of runway on hand. If you’re sitting at less than 6 months of runway, that’s often seen as a red flag, and it might affect your ability to raise funding on favorable terms.
When you’re pitching to investors, your burn rate helps them understand whether your ask makes sense. For example, if you’re burning $100,000 a month and asking for $5 million, that’s 50 months of runway. Unless you’re planning a huge hiring spree or international expansion, they’ll likely ask why you need so much cash.
On the flip side, if you’re burning $300,000 a month, that same $5 million only gives you about 16 months of runway—which might seem risky unless you’re growing fast and have a clear path to profitability.
As Mark Suster, Managing Partner at Upfront Ventures, observes: “No matter how much you raise ... you’ll end up spending it in 12–24 months,” often closer to 12–18 months. In his words: “People do what people do. You have money, you spend it.”
What’s A “Good” Burn Rate?
There’s no one-size-fits-all answer to this. A good burn rate depends on your business model, growth goals, industry, and cash reserves. What’s sustainable for one company could be reckless for another.
In general, a healthy burn rate allows your company to grow steadily without putting your future at risk. If your expenses are too low, you might be growing too slowly to compete. But if your burn is too high, you risk running out of money before you can show results.
The smartest approach is to align your burn rate with your milestones. If you’re gearing up for a product launch or a big marketing push, a temporarily higher burn might be strategic. Just make sure there’s a clear plan and timeline for turning that investment into results.
It’s also important to note that burn rate expectations vary by industry. Those with high overhead costs and expenses (like those in the hospitality or eCommerce) naturally burn more cash each month. On the other hand, lean, remote-first companies in SaaS or digital services typically operate with significantly lower burn rates.
Ultimately, if your cash flow is positive, your runway is stable, and you’ve built in enough buffer to handle unexpected costs or downturns, you’re likely in a good position.
Tips for Managing Your Burn Rate
Managing your burn rate can help you increase the likelihood that you’re on a solid track towards long-term growth and success.
To manage and improve your burn rate, consider the following tips:
- Account for unexpected costs. You don’t want to be just at the point of profitability that a huge unexpected expense, like legal fees, a slight bump in the economy, or an increase in raw materials, could cost you the business. Having enough wiggle room in the budget can be essential.
- Track fixed and variable costs regularly. Fixed costs remain constant month-over-month for a set period, whereas variable costs fluctuate based on sales, production, and manufacturing volume; account for both to make financial decisions throughout the month.
- Find ways to reduce overhead costs. Negotiating with (or changing!) suppliers can sometimes make a huge impact. Cutting back on tools you don’t need, considering third-party contractors instead of full-time workers, and even downsizing an office can make a huge impact.
- Invest in financial reporting analytics tools. Tools like Baremetrics can give you a complete understanding of what’s happening with your business’s finances. This can help you make smarter decisions to improve your burn rate.
Final Thoughts
Burn rate is one of the most important metrics for understanding the health and longevity of your business. It’s not just for startups raising money; every company benefits from knowing how fast they’re spending cash and whether that pace is sustainable.
The sooner you get a handle on your burn rate, the more confident you’ll be in managing your finances, pitching to investors, and planning for long-term growth.
👉 Want to make smarter decisions about your cash flow?
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