Burn rate is a critical metric for startups, distinguishing between gross burn, the total cash outflow, and net burn, the total cash loss considering income.
What is burn rate?
Your cash burn rate is the speed at which your company—especially in its early stages—spends money, typically measured monthly. There are two types: gross burn, which reflects your total monthly cash outflow, and net burn, which shows your total monthly cash loss after accounting for revenue. Tracking both helps you understand your financial health and how long your cash reserves are likely to last.
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For venture-backed companies, cash runway is critical to sustaining growth and securing future funding. Tracking financial metrics—especially cash inflows and outflows—on a monthly basis is the only way to stay on top of your company’s financial health. Gross burn and net burn are central to runway calculations and help startups fund their strategies, manage spend, and improve their positioning for future valuation. Understanding your burn rate also gives you clarity into your biggest cost drivers, helping you make informed decisions about where to invest and which revenue streams to prioritize.
Gross burn vs. net burn
Gross burn rate measures your total monthly cash outflow, while net burn rate reflects your total monthly cash loss after accounting for revenue. In other words, gross burn looks only at expenses, whereas net burn factors in income as well. Tracking gross burn helps you understand your core cost drivers and reveals how much money your business needs to operate, independent of any revenue coming in.
Net burn, on the other hand, measures your monthly net spend—or negative cash flow—after factoring in revenue. Because it accounts for income, net burn can fluctuate more than gross burn depending on changes in revenue streams.
Below, we take a closer look at both metrics in more detail.
What is gross burn?
Gross burn is a key financial metric for startups and venture-backed companies, representing the total monthly operating expenses required to keep the business running. This includes costs like salaries, rent, utilities, software subscriptions, marketing, and other day-to-day expenses. It’s a critical indicator of how quickly a company is spending its cash and is often used to assess the sustainability of operations and inform strategic decisions.
How to calculate gross burn:
Calculating gross burn is simple—just total all operating expenses for the month:
- Gross burn rate = total monthly operating costs
This figure reflects your company’s total monthly cash outflow, without factoring in any revenue earned.
What is net burn?
While gross burn gives insight into a company’s total monthly expenses, net burn provides a more complete picture of financial health by factoring in revenue. Net burn represents the actual amount of cash a company loses each month, offering a clear view into how quickly it’s using its capital reserves. This makes it a critical metric for entrepreneurs, founders, and investors when evaluating the sustainability of a company’s business model.
How to calculate net burn:
Net burn is calculated by analyzing cash flow from operations—specifically, cash in minus cash out—over a given period, excluding bank transfers and financing activities. You can also estimate it using monthly revenue with the following formula:
For example, if your monthly expenses are $10,000 and you generate $4,000 in revenue, your net burn is $6,000. Because burn measures loss, this means you’re losing $6,000 each month—an amount that comes directly out of your cash runway. Understanding this helps you estimate how many months you can continue operating without raising additional funding.
You can also calculate burn rate using your starting and ending cash balances instead of monthly revenue and expenses:
This approach provides a high-level view of cash loss over a set period.
How startups use net burn
Understanding and managing your net burn rate is essential for any startup aiming to grow sustainably. This core financial metric plays a crucial role in everything from budgeting and headcount planning to fundraising conversations. By keeping a close eye on net burn, startups can make informed decisions about where to cut costs, when to invest in growth, and how long their runway will last. In this section, we’ll explore how startups can use net burn rate to improve financial efficiency and support long-term planning.
Analyzing operational efficiency
Finance leaders and founders rely on net burn to assess operational efficiency and sustainability. In the early stages, startups often operate in “growth at all costs” mode—prioritizing speed and market share while raising successive funding rounds to fuel expansion. But when the venture funding environment tightens, priorities shift. Growth with a focus on efficiency becomes critical, and that’s when net burn becomes even more important. It helps leaders make strategic decisions about spending, prioritize investments, and extend runway in uncertain markets.
Calculating runway
One of the most common uses of net burn is to calculate cash runway—the number of months your business can continue operating before depleting its cash reserves. By dividing your current cash balance by your monthly net burn, you get a clear estimate of how long you can sustain operations without additional funding. This insight is essential for strategic planning, especially in fast-paced or uncertain market conditions.
Runway is calculated using the following formula:
Suppose you have a total amount of cash of $1,000,000 on hand with a net burn amount of $60,000 per month. Your runway would be $1,000,000/$60,000 or 16.7 months.
Runway helps founders and finance leaders decide when to start a new fundraising round or set goals for when the business needs to begin turning a profit.
Benchmarking efficiency
Experts recommended most early-stage startups have a 12-18 month runway to achieve set goals and secure new funding.
But a study by Florida International University found that the average time between funding rounds fell between 18 and 22 months. So, to be on the safe side, you may want to set your runway goals at 18 months or higher.
Once you know how long you want your runway to be, you can calculate your net burn benchmark. If you want 18 months of runway, your net burn should be equal to 1/18th of your total cash available.
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Advantages and disadvantages of net burn
Net burn is a key metric for startup founders and investors because it offers a straightforward way to understand how long a company can operate without new funding. Including net burn in board decks or investor updates helps demonstrate progress toward profitability and provides clarity on how much additional revenue is needed to reach break-even.
However, while net burn is valuable, it does have limitations. It doesn’t give a full picture of your cash flows or the specific drivers behind your costs and revenue. To make informed, strategic decisions, you’ll need a deeper understanding of those underlying factors. Like any metric, net burn is most effective when paired with clear insights into the “why” behind the numbers and a plan for improving them over time.
Key takeaways
- Burn rate is a critical metric for startups, distinguishing between gross burn (total cash outflow) and net burn (total cash loss considering income)
- Gross burn provides insight into overall expenses, helping startups understand their cost drivers and operational needs
- Net burn offers a comprehensive view of financial health by factoring in revenue, essential for strategic planning and investor relations
- Efficient management of burn rate involves tracking costs, prioritizing growth, controlling fixed expenses, and focusing on customer retention
- Understanding and optimizing burn rate is pivotal for calculating cash runway and preparing for future funding rounds
4 ways startups can manage net burn rate
Most startups take at least 3–4 years to reach profitability, so negative cash flow early on is expected. But that doesn’t mean you can afford to burn through capital without intention. Managing your burn rate is critical to making it to your next round of funding—and beyond.
Here are four actionable steps to help keep your monthly burn rate under control:
1. Track costs by category
It’s not enough to know how much money is leaving your business each month—you also need to understand where it’s going. Break down expenses by category to identify your biggest cost drivers. This level of visibility helps you pinpoint inefficiencies and uncover areas where you can reduce spending.
2. Prioritize your growth objectives
Startups succeed when they prioritize ruthlessly. With limited resources, you can’t chase every opportunity at once. Focus on the milestones that matter most to your customers and investors, and align spending accordingly. This keeps your burn lean and strategic.
3. Lower your fixed expenses
Avoid locking yourself into high fixed costs early on. Opt for flexible options—like renting office space instead of buying or working with contractors instead of full-time hires for non-core roles. This flexibility helps you stay agile and maintain control over your burn rate as your business evolves.
4. Don’t neglect existing customers
While expanding into new segments is key to long-term growth, your current customers are your most reliable revenue source. It’s also more cost-effective to retain and grow existing accounts than to acquire new ones. Track metrics like retention rate, churn, and MRR to ensure your revenue stays stable—or better yet, continues to grow.
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Net burn FAQs
How can a startup effectively manage its net burn rate?
Startups can manage their net burn rate by closely tracking costs by category, prioritizing key growth objectives, keeping fixed expenses low, and focusing on customer retention to stabilize or increase monthly revenue. These strategies help extend runway and ensure capital is being spent efficiently.
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Does a high net burn rate always indicate a problem?
Not necessarily. A high net burn rate can be part of a deliberate growth strategy—especially in the early stages. What matters most is that the company is tracking the metric closely and has a clear plan for reaching profitability or securing additional funding before cash reserves run out.
Is there a “good” or “bad” net burn rate?
There’s no universal benchmark. The right net burn rate depends on your business model, growth strategy, and stage of development. Early-stage companies often run higher burn rates as they invest in building product and acquiring customers, while more mature companies may focus on lowering burn as they move toward profitability. The key is ensuring your burn rate aligns with your strategic goals and available runway.
