What is burn rate? How to calculate gross burn, net burn and runway

Burn rate is the speed at which a business uses up its cash, usually measured per month. There are two versions. Gross burn is everything you spend in a month. Net burn is what you spend minus the cash that comes in, so it shows how fast your bank balance is really falling. Divide your cash by net burn and you get your runway: the number of months before the money runs out.

Burn rate is most associated with venture-backed startups, but any business that is not yet profitable, or is investing ahead of revenue, needs to know it. Running out of cash is one of the most common reasons small businesses close, as our guide on why small businesses fail shows.

Burn rate formulas

Gross burn rate

Total operating cash spent in a month: salaries, rent, software, marketing and other costs.

Net burn rate

Cash spent − cash received in the same month. If revenue is $7,000 and spending is $25,000, net burn is $18,000.

Cash runway

Cash in the bank ÷ net burn rate, in months.

Worked example

A small software company has $180,000 in the bank. Each month it spends $25,000 and collects $7,000 from customers.

If revenue grows to $10,000 a month, net burn falls to $15,000 and runway stretches to 12 months. If a new hire adds $6,000 of monthly cost, net burn rises to $24,000 and runway shrinks to 7.5 months. Small changes move the date a lot.

How to calculate burn rate from your bank balance

If your books are messy, use the change in cash over a few months:

Net burn = (starting cash − ending cash) ÷ number of months

Cash fell from $240,000 on 1 January to $186,000 on 1 April. That is $54,000 over three months, or $18,000 a month. Using a three-month average smooths out one-off bills and lumpy customer payments. Leave out money raised from investors or loans, since that is financing, not operations.

Common mistakes

• Counting annual prepayments as monthly income. A customer paying a year upfront boosts cash today but not next month. Our ARR vs MRR guide explains the difference between recurring revenue and cash.
• Forgetting irregular costs. Annual insurance, tax bills, equipment and hiring fees all hit the bank, even if they are not monthly.
• Using a single month. Take an average of three months, or model month by month if spending is changing.
• Assuming revenue will grow on schedule. Build a version where growth is slower than planned and see what runway that gives you.

What is a good burn rate?

There is no single good number. What matters is what the burn buys. Two measures help:

• Runway: most investors and founders aim for 18 to 24 months after a funding round and treat anything under 12 months as a warning sign. Fundraising often takes six months or more, so leave room.
• Burn multiple: popularised by investor David Sacks, it is net burn ÷ net new ARR over the same period. A business that burns $1.5M to add $1M of new annual recurring revenue has a burn multiple of 1.5. Under 1 is excellent; above 2 means growth is expensive.

For a small business without investors, the goal is simpler: reach break-even before the cash runs out. The Break-even Calculator and our break-even point guide show how many sales that takes.

Default alive or default dead?

A quick test from the startup world: if costs stay flat and revenue keeps growing at its recent rate, will you reach profitability before the money runs out? If yes, the business is "default alive". If not, you are relying on raising more money or making changes, and you should plan for both now rather than later.

How to extend your runway

1. Cut costs that do not drive revenue. Review software subscriptions, unused office space and low-return marketing first. The Meeting Cost Calculator is a sobering way to find hidden time costs.
2. Collect cash faster. Invoice promptly, shorten payment terms and chase late payers. A clear invoice helps.
3. Offer annual plans. Upfront payments improve cash today, though not recurring revenue.
4. Raise prices. A modest increase on new customers often has more effect than a cost cut. Check the effect on margin first.
5. Delay hiring. Payroll is usually the largest line, and the hardest to reverse.

FAQ

What is the difference between burn rate and runway?

Burn rate is how much cash you lose each month. Runway is how many months your cash will last at that burn rate: cash ÷ net burn.

Is a high burn rate bad?

Not on its own. A high burn that produces fast, efficient growth can be healthy. It becomes a problem when runway is short or each dollar burned brings in little new revenue.

Should I use gross or net burn to calculate runway?

Use net burn, because it counts the cash coming in. Gross burn is useful for seeing your full cost base and for a worst case where revenue stops.

How often should I calculate burn rate?

Every month, as soon as the books close. Update your runway after any big change, such as a new hire, a lost customer or a price change.