What Is Burn Rate?
Burn rate is the speed at which a company spends its available cash. It is one of the most critical metrics for startups that are not yet profitable. Gross burn rate is the total monthly operating expenditure, including salaries, rent, software, marketing, and all other costs. Net burn rate factors in any revenue the company generates, giving a more accurate picture of how fast cash is actually leaving the business. For example, a startup spending $80,000 per month with $20,000 in monthly revenue has a gross burn of $80,000 and a net burn of $60,000. Understanding both figures helps founders make informed decisions about hiring, spending, and fundraising timelines.
Why Cash Runway Matters
Runway is the number of months a startup can continue operating before running out of cash. It is calculated by dividing the current cash balance by the net monthly burn rate. Most venture capitalists and startup advisors recommend maintaining at least 12 to 18 months of runway. Having sufficient runway gives founders time to hit key milestones, iterate on product-market fit, and raise the next round of funding without desperation. Running low on runway forces founders into unfavorable negotiations and can lead to premature shutdowns of otherwise viable businesses.
Key Burn Rate Concepts
Several related metrics help paint the full financial picture. The zero-cash date is the projected calendar date when the company will run out of money at the current burn rate. Months of runway is the same idea expressed as a count of months. Default alive vs. default dead is a framework by Paul Graham that asks whether revenue growth will outpace spending before cash runs out. Understanding these concepts lets founders take proactive steps like cutting expenses, accelerating revenue, or starting fundraising earlier.
Best Practices for Managing Burn Rate
Review your burn rate monthly and present it to your board or advisors. Keep fixed costs low in early stages by using shared workspaces, open-source tools, and lean teams. Model multiple scenarios: best case, expected case, and worst case. Start fundraising when you have at least 6 months of runway remaining, as raising a round typically takes 3 to 6 months. Use this calculator regularly to project how changes in hiring, pricing, or revenue targets affect your runway. The earlier you identify a runway problem, the more options you have to solve it.
