Burn rate

Burn rate is the rate at which a business consumes cash reserves, typically expressed as a monthly figure. It is the central metric in early-stage business management because it determines how long the business can operate before requiring additional revenue or funding.

Gross burn vs net burn

Two different burn rate figures coexist and the difference matters.

Gross burn rate is total monthly cash outflows — every expense the business incurs. It includes salaries, software subscriptions, rent, marketing, professional fees, and any other cash expense.

Net burn rate is gross burn minus monthly revenue. A business with $200,000 monthly gross burn and $80,000 monthly revenue has a net burn of $120,000 — that is the actual cash drain on reserves.

Net burn is the figure most relevant for runway calculations. Gross burn is the figure most relevant for cost discipline.

Calculating runway

Runway is the time before cash reserves are depleted at the current net burn rate.

Runway (months) = Cash reserves ÷ Net burn rate

For a business with $1.5 million in cash and $120,000 monthly net burn:

Runway = $1,500,000 ÷ $120,000 = 12.5 months

The runway figure is the single most important number in early-stage business planning because it sets the deadline by which the business must achieve one of three outcomes:

• Reach cash-flow break-even (revenue exceeds gross burn)
• Raise additional capital
• Reduce burn through cost-cutting

A common rule of thumb is to maintain at least 12 months of runway during normal operation, with 18+ months considered comfortable and 6 months considered the warning zone where decisive action is required.

What drives burn rate

For most knowledge-work businesses, burn rate is dominated by three categories:

Salaries and on-costs typically account for 60–80% of total burn. Each headcount addition represents not just the salary but the full loaded cost including benefits, taxes, equipment, and workspace. The fastest way to increase burn is to hire; the fastest way to reduce burn is to reduce headcount.

Software, infrastructure, and tools can run 10–25% of burn for technology-intensive businesses. Subscription costs scale with usage and team size, often more steeply than expected.

Office, professional, and operating costs make up the remainder — rent, utilities, professional fees, marketing, travel, and the various smaller operating costs.

For each category, the discipline of “what is the minimum needed to support the next 12 months of operation” tends to produce a different answer than “what is the steady-state cost of the operation we have.”

How burn rate changes over a business’s life

Early-stage businesses typically have high burn rates relative to revenue, spending heavily on team and product development before revenue scales. Net burn is high; runway is the constraint.

Growth-stage businesses have rising revenue that increasingly offsets burn. Net burn declines or turns positive (cash generation rather than burn), but gross burn often continues to grow as the business scales.

Mature businesses ideally generate cash net of operating expenses. The concept of burn rate becomes less central; cash flow margin replaces it.

The transition through these stages is one of the most important narratives in any business’s history, and the burn-rate trajectory is the key indicator of whether the transition is happening as planned.

Why it matters

The single most common cause of small business failure is running out of cash. Sometimes this is because revenue did not develop as expected; sometimes it is because spending grew faster than revenue. In both cases, regular burn rate analysis would have surfaced the trajectory months earlier and allowed action while options remained.

For founders and operators, the discipline is to know the burn rate down to the line item, model the runway weekly during high-uncertainty periods, and update the projection any time a major cost decision is made. A founder who can recite the current burn rate and runway off the top of their head is generally a founder who is going to manage cash well.