Burn Rate
The amount of cash a company spends per month in excess of what it earns. Gross burn is total monthly spend; net burn subtracts revenue collected. Burn rate is the rate at which runway depletes.
Burn rate is a startup's monthly cash consumption. It's the rate at which a company is depleting its cash reserves, and together with cash on hand, it determines runway — how many months of life the company has at the current spend level.
Burn rate formula: gross burn vs net burn
Two standard variants:
Gross burn = Total monthly cash outflow
Net burn = Gross burn − Cash revenue collected that month
| Variant | Includes | When to use |
|---|---|---|
| Gross burn | Payroll + infrastructure + marketing + rent + everything | Worst-case planning when revenue is volatile |
| Net burn | Gross burn minus revenue actually collected | Runway calculations, board reporting |
Net burn is the figure that drives runway calculations. Gross burn matters when revenue is volatile and the founder wants to plan against the downside.
Burn rate calculator: worked example
A startup spent the following in Q1:
- Payroll: $300,000/mo
- Cloud + tools: $40,000/mo
- Marketing + ads: $80,000/mo
- Rent + overhead: $30,000/mo
- Gross burn: $450,000/mo
Cash revenue collected: $150,000/mo
Net burn: $450,000 − $150,000 = $300,000/mo
With $3.6M in the bank, runway = $3,600,000 / $300,000 = 12 months.
Cash burn vs accrual burn
Burn rate is a cash concept, not an accrual concept. A SaaS company billing $120k annually upfront has zero cash inflow in months 2–12 of that contract, even though it recognizes $10k of revenue each month under GAAP. Cash collected leads cash spent for annual-billed SaaS, which is one reason annual billing materially extends runway compared to monthly.
This matters at board reporting: investors care about both. The MRR/ARR walk shows the GAAP picture; the cash burn shows the survival picture.
What is a good burn rate? The Burn Multiple
Burn rate alone is meaningless without growth context. The standard VC-backed SaaS benchmark is the Burn Multiple, popularized by David Sacks in 2020:
Burn Multiple = Net burn / Net New ARR
| Burn Multiple | Interpretation |
|---|---|
| < 1.0 | Best-in-class — each $1 burned produces more than $1 of net new ARR |
| 1.0–1.5 | Great |
| 1.5–2.0 | Efficient |
| 2.0–3.0 | Still investable in growth markets |
| > 3.0 | Requires explanation; usually signals inefficient go-to-market |
A burn multiple of 1.5 means burning $1.5M to produce $1M of new ARR — typical for a growth-stage SaaS scaling sales motion. Above 3.0 either means the GTM motion is broken or the company is pre-PMF and the burn is paying for product development, not growth.
Common burn rate mistakes
| Mistake | Why it happens | Fix |
|---|---|---|
| Reporting gross burn as "burn" | Sounds more impressive in pitches | Use net burn; report gross alongside |
| Excluding founder/exec comp | Makes burn look healthier | Include all cash compensation |
| Ignoring one-time spend | "It was just this quarter" | Track recurring vs one-time separately; both count toward runway |
| Counting unbilled MRR as cash revenue | Confuses GAAP with cash | Cash burn uses cash collected, not GAAP revenue |
| Assuming burn scales linearly | Hiring lumps create step-changes | Forecast burn with named hires + their start dates |
When to cut burn
The trigger isn't a fixed runway threshold — it's a trend. Cut burn when:
- Runway falls below 18 months with no committed term sheet
- Burn Multiple exceeds 2.0 for two consecutive quarters
- The next-round funding environment tightens (track public SaaS multiples — when they compress, private markets follow within 6 months)
- ARR growth deceleration paired with rising burn (the worst combination)
The cuts that work first: pause un-started hires, freeze tools, defer optional spend. The cuts that follow: reduce ad spend in unprofitable channels, restructure underperforming sales territories. The cuts that come last and hurt most: layoffs.
Related
- Runway — how burn translates to months of life
- ARR / MRR — the revenue figure that pairs with burn
- Unit Economics — whether the burn produces durable revenue
- CAC — a major component of burn for any GTM-led business
See also
- GlossaryRunway
- GlossaryUnit Economics
- GlossaryARR / MRR