Glossary
What Is Burn Rate?
Updated · Team Fonda
Short answer
Burn rate is the amount of cash a business uses up each month. Gross burn is total monthly cash spending. Net burn is spending minus the cash that came in from customers, and it is the figure that shows how fast your bank balance is falling.
Key takeaways
- Gross burn = total cash spent in a month.
- Net burn = cash spent - cash received from customers.
- Divide your cash by net burn to get runway, the months you have left.
- Burn is measured in cash that moved, not in invoices or promises.
What burn rate means in plain words
A new business usually spends more than it earns for a while. Burn rate measures the speed of that. If you start a month with $50,000 and end it with $42,000, you burned $8,000.
There are two versions. Gross burn counts only the money going out, so it shows the size of your cost base. Net burn subtracts the money coming in. When people say burn rate without saying which, they usually mean net burn.
How to calculate burn rate
Formulas
Gross burn = total cash paid out in a month. Net burn = total cash paid out - cash received from customers. Shortcut for net burn: (cash at start of period - cash at end of period) / number of months.
The shortcut works from bank statements alone, as long as you remove any money that came from investors or loans during the period. Averaging over three months smooths out bills that land once a quarter. The burn rate calculator does both versions.
A worked example
These figures are made up. Say you run a small software company with this average month.
| Item | Cash per month |
|---|---|
| Two salaries | $12,000 |
| Contractors | $3,000 |
| Software and hosting | $1,500 |
| Marketing | $1,500 |
| Gross burn | $18,000 |
| Cash received from customers | $7,000 |
| Net burn | $11,000 |
Check it against the bank. If you began the quarter with $132,000 and ended with $99,000, and took in no outside money, you used $33,000 in three months, which is $11,000 a month. With $99,000 left and net burn of $11,000, your runway is 9 months. You can confirm that in the startup runway calculator.
Why it matters and when you meet it
Burn rate turns a vague worry about money into a date. Once you know it, you know how many months you have to reach your next proof point, whether that is first revenue, break-even or a funding round. Investors ask for it early, because it shows how carefully you spend and how long their money would last.
It applies before you have a company too. If you plan to leave your job, your living costs plus your business costs are your personal burn, and your savings are the cash. The quit your job calculator is built for that sum. You set your first planned burn when you write the financial chapter of a business plan, using a list of startup costs. Fonda's business plan is one of the steps in its Launch phase, so you can work this out there or with the calculators here.
Common mistakes
- Using profit and loss figures. An invoice you sent is not cash until it is paid. Burn is about cash that has moved.
- Missing irregular bills. Annual software, insurance and tax payments belong in the average.
- Leaving out your own pay. If you will need the business to pay you, plan for it now.
- Counting investment as income. Money raised refills the tank. It does not reduce burn.
- Checking once. Burn changes as soon as you hire or start advertising, so review it every month.
Related terms
- Runway: the months of cash you have left at your current net burn.
- Break-even point: the level of sales where net burn reaches zero.
- Bootstrapping: funding the business from your own money and its revenue, which forces a low burn.
Frequently asked questions
What is a good burn rate for a startup?
There is no single good number. A burn rate is reasonable when it buys real progress and leaves enough runway to reach your next milestone with time to spare. Judge it against your cash and your plan, not against other companies.
What is the difference between gross burn and net burn?
Gross burn is everything you spend in a month. Net burn is what you spend minus what customers pay you. A company with no revenue has the same gross and net burn.
Can a profitable business have a burn rate?
If more cash comes in than goes out, net burn is zero or negative, and people say the business is cash-flow positive. A business can still show a profit on paper and burn cash if customers pay late.
How do you reduce burn rate?
Cut or delay fixed costs such as hires and long contracts, move to monthly billing where you can, and bring cash in earlier with deposits or pre-orders. Small recurring costs are worth a review as well, because they add up.