Definition
Burn rate is the speed at which a company spends its cash, usually measured per month. There are two versions:
- Gross burn is total monthly spending: payroll, software, rent, marketing, everything.
- Net burn is spending minus revenue: how much cash you actually lose each month.
Formula
- Gross burn = total monthly operating expenses
- Net burn = monthly expenses − monthly revenue
Example
A startup spends $40,000 a month and brings in $15,000 in revenue.
- Gross burn: $40,000
- Net burn: $40,000 − $15,000 = $25,000
With $300,000 in the bank, that's 12 months of runway.
Which one matters?
Net burn decides how long the money lasts, so it's the number investors and founders watch most. Gross burn is useful for a different question: how much would you have to cut if revenue suddenly stopped?
Common mistakes
- Using last month only. Burn moves around; use an average of the last three months.
- Forgetting upcoming costs. A new hire or an annual renewal next month changes the real number.
- Counting money you haven't received. Revenue that's invoiced but unpaid doesn't lower burn until it arrives.
How to lower it
Cut unused software, renegotiate big contracts, collect unpaid invoices, and raise prices. Each one lowers net burn. See how to reduce burn rate for the order to do it in.