Burn rate is when a company spends its cash reserves before turning profitable. Tracking burn rate is critical for startups and businesses to generate steady revenue. It gives insights into how long you can sustain operations with the cash on hand, also known as your financial “runway.”

Startups often need help with high costs while trying to establish themselves in competitive markets. Burn rate helps you monitor those expenses and plan for what’s ahead. Whether you are trying to stretch your runway or secure more funding, this metric keeps your financial health in check.

Two Types of Burn Rate

When discussing burn rate, it’s important to differentiate between gross and net burn rates.

1. Gross Burn Rate

Gross burn is the total monthly operating expenses. It gives you an idea of how much cash your company spends every month, regardless of income. This includes salaries, rent, utilities, and marketing.

2. Net Burn Rate

Net burn rate accounts for revenue. It’s the actual amount of cash your company is losing monthly. To calculate it, subtract your gross burn from your income.

For example, if your gross burn is $50,000, but you’re bringing in $20,000 in revenue, your net burn rate is $30,000. Understanding the differences between these two numbers helps you gauge your business’s financial health.

How to Calculate Burn Rate

Calculating your burn rate is straightforward, but accuracy is key.

• Gross Burn Rate Formula:

Gross Burn Rate = Monthly Operating Costs

• Net Burn Rate Formula:

Net Burn Rate = (Monthly Revenue – Cost of Goods Sold) – Gross Burn Rate

You’re spending $40,000 monthly on salaries, office space, and other expenses. That’s your gross burn. Now, if your company earns $25,000 in revenue with $10,000 in costs of goods sold, your net burn is $25,000 – $10,000 – $40,000 = $25,000.

Your financial runway depends directly on these numbers, calculated as follows:

Runway = Cash on Hand ÷ Burn Rate

For instance, you have six months of runway if you have $150,000 in reserves and a $25,000 burn rate.

Why Burn Rate Is Important

Burn rate does more than show how fast you’re spending money. It guides you in making smart choices about budgeting, hiring, and planning growth.

Runway Management

Runway is a vital metric for any business. It tells you how long you can operate before running out of cash. If your runway is short, you need to act fast by cutting costs or increasing revenue.

The burn rate influences future funding for startups relying on investor funding. Investors often assess your burn rate to decide if your business is a viable long-term investment.

Early Warning System

A rising burn rate can signal overspending. Monitoring it allows you to address inefficiencies before they become more significant problems. Early action is crucial, whether cutting unnecessary costs or renegotiating vendor contracts.

Common Factors Driving High Burn Rates

Burn rate is affected by both internal and external factors.

1. Internal Factors:

• Staffing Costs: Hiring too many employees can quickly deplete cash reserves.
• Marketing Spend: Paid ads can drain if not paired with measurable returns.
• Office Space: Expensive leases often outpace actual business needs.

2. External Factors:

• Economic Changes: Market shifts, like supply chain disruptions, can increase costs.
• Competitors: New competition may force businesses to spend more on marketing or lower prices.
• Unexpected Events: Legal fees, natural disasters, or regulatory changes can spike expenses.

How to Lower Your Burn Rate

If your burn rate feels unsustainable, there are actionable steps to reduce it.

Step 1: Reevaluate Staff Needs

Focus on critical roles that drive growth. Avoid over-hiring.

Step 2: Trim Marketing Costs

Shift to organic growth strategies like content marketing or social media.

Step 3: Negotiate Vendor Contracts

Regularly review contracts for better terms or cost savings.

Step 4: Eliminate Low-Performing Products

Focus resources on offerings that generate consistent revenue.

Step 5: Switch to Flexible Workspaces

Consider downsizing or opting for coworking options if leasing office space.

Balancing Burn Rate and Growth

Cutting costs is tempting, but achieving growth also requires spending. The goal is to balance conserving cash and investing in areas that drive long-term value.

Startups often accept a higher burn rate during their growth phase. To support this approach, set clear goals to support this approach, like gaining more customers or raising revenue. Tracking customer acquisition cost (CAC) and lifetime value (LTV) metrics can guide your spending.

Risks of a High Burn Rate

A high burn rate can shorten your runway, putting your company at financial risk. It may also lower investor confidence, making it harder to secure funding. High burn rates often push businesses to take drastic steps, such as laying off employees or stopping operations, to survive.

Tools to Monitor Burn Rate

Tracking the burn rate doesn’t have to be overwhelming. Use financial tools and software to stay on top of your numbers. Regular reviews of your cash flow and monthly expenses can help identify trends early, giving you time to act.

Final Thoughts

Startups and growing businesses rely on burn rate as an important metric. It’s more than just a number—it reflects your financial health and decision-making. By closely monitoring your burn rate, you can plan for the future, attract investors, and avoid common pitfalls. Managing and keeping track of your burn rate, whether you’re just starting out or growing, helps you build a solid path to lasting success.