Burn Rate: Gross vs. Net, and How to Calculate It
By Newtown Analytics · · 7 min read
For startup founders
Burn rate is the speed at which a company uses its cash, usually measured per month. Gross burn is the total cash spent each month. Net burn is cash spent minus cash received, so it shows the actual drain on the bank balance. Burn rate tells you how quickly cash will run out, and it is the starting point for runway planning. This guide explains both measures, shows worked examples, relates burn to runway and efficiency, and describes how to control it. It belongs to cash flow management.
Gross burn vs. net burn
| Measure | Definition | Formula |
|---|---|---|
| Gross burn | All cash going out in a period | Total cash operating and investing outflows |
| Net burn | Cash going out less cash coming in | Cash outflows - cash inflows |
Gross burn tells you the size of your cost base. Net burn tells you the rate at which your bank balance is falling. A company with strong revenue can have a high gross burn and a small net burn.
Worked example
A hypothetical company has the following cash flows in a month.
| Item | Amount |
|---|---|
| Payroll and benefits | $120,000 |
| Suppliers and inventory | $45,000 |
| Marketing | $25,000 |
| Rent, software and other | $30,000 |
| Gross burn (total cash out) | $220,000 |
| Customer receipts | $140,000 |
| Net burn | $80,000 |
The company spends $220,000 and collects $140,000, so its bank balance falls by $80,000 a month.
Using more than one month
Burn varies month to month. Use an average of three to six months, and look at the trend.
| Month | Gross burn | Cash received | Net burn |
|---|---|---|---|
| Month 1 | $210,000 | $120,000 | $90,000 |
| Month 2 | $215,000 | $135,000 | $80,000 |
| Month 3 | $220,000 | $140,000 | $80,000 |
| Month 4 | $225,000 | $155,000 | $70,000 |
| Average | $217,500 | $137,500 | $80,000 |
Net burn is improving, from $90,000 to $70,000, because receipts are growing faster than costs.
Burn rate and runway
Runway is the number of months the company can continue at the current burn.
Runway (months) = Cash balance / Net burnWith $960,000 in the bank and a net burn of $80,000, runway is $960,000 / $80,000 = 12 months.
Runway is only as reliable as the burn assumption. If burn is expected to rise because of planned hiring, subtract the projected burn month by month. For example, if burn rises by $5,000 each month, the cumulative burn over 10 months is 10 × $80,000 + $5,000 × (0 + 1 + 2 + ... + 9) = $800,000 + $5,000 × 45 = $1,025,000. After 10 months, the company would have used $1,025,000, but it has only $960,000, so cash runs out in the tenth month. After nine months, $900,000 has been used and $60,000 remains, against a tenth-month burn of $125,000, so runway is about 9.5 months, not 12. The full method is in cash runway: how to calculate it and how to extend it.
Cash burn vs. accounting loss
Net burn is a cash measure. It differs from the net loss in the income statement because of timing and non-cash items.
| Difference | Effect on burn vs. loss |
|---|---|
| Depreciation and amortization | Reduce the loss but are not cash; burn is lower than the loss |
| Inventory purchases | Cash out before the expense is recorded; burn is higher |
| Customer prepayments (deferred revenue) | Cash in before revenue; burn is lower |
| Capital spending | Cash out but not an expense; burn is higher |
| Debt principal payments | Cash out but not an expense; burn is higher |
| Receivables growth | Revenue recognized but cash not received; burn is higher |
For tracking survival, use cash burn. For measuring performance, use the loss. See cash flow vs. profit.
Burn multiple and efficiency
Burn tells you how fast cash is used. Efficiency measures what you get for it. One metric some investors use for growth companies is the burn multiple.
Burn multiple = Net burn / Net new recurring revenue (for the same period)If the company with an $80,000 monthly net burn adds $40,000 of annualized recurring revenue each month, its burn multiple is $80,000 / $40,000 = 2.0. It spends $2.00 of net cash to add $1.00 of new annual recurring revenue. A lower multiple indicates more efficient growth. There is no universal threshold, and the relevant figure depends on the stage and market. Use the metric to track your own trend and to explain your growth plan.
For non-subscription businesses, other efficiency measures may fit better, such as contribution margin per dollar of marketing or gross margin return on inventory investment.
Burn rate in different businesses
| Business | What drives burn | Typical issues |
|---|---|---|
| Early-stage software | Payroll, hosting, marketing | Hiring ahead of revenue |
| Product company | Inventory purchases, tooling, deposits | Cash goes out months before sales |
| Services firm | Payroll and contractors | Slow client payments |
| Seasonal business | Pre-season purchasing and staffing | Troughs before peaks |
| Mature company with a temporary loss | Fixed costs during a downturn | Covenant pressure |
Product companies should pay close attention to the timing of inventory purchases, which can make burn lumpy. A demand plan that smooths purchasing smooths burn. See demand planning and inventory optimization.
How to reduce burn
Start by understanding what drives it.
- Map gross burn by category and rank by size and flexibility.
- Identify fixed and variable items. Contracts and leases are fixed in the short run.
- Look for quick wins: unused software, duplicated services, discretionary travel.
- Challenge hiring plans: delay or stage hires linked to milestones.
- Improve receipts: faster collections and billing, pre-payments, better terms. See how to speed up accounts receivable collections.
- Reduce inventory and purchase commitments where demand does not support them. See working capital optimization.
- Renegotiate with suppliers for better pricing or terms. See how to negotiate better supplier payment terms.
- Raise prices or improve margins, if the market allows.
- Prioritize spending that returns cash fastest.
A cost-control plan with specific savings, dates and owners works better than a general intention. See how to build a cash preservation plan before you need one.
A worked burn dashboard
A one-page view helps management see burn and its drivers together.
| Measure | This month | Prior month | Three-month average | Comment |
|---|---|---|---|---|
| Gross burn | $225,000 | $220,000 | $220,000 | Payroll up after two hires |
| Cash received | $155,000 | $140,000 | $145,000 | Two large invoices collected early |
| Net burn | $70,000 | $80,000 | $75,000 | Improving |
| Cash balance | $820,000 | $890,000 | ||
| Runway at three-month average | 10.9 months | $820,000 / $75,000 | ||
| Runway on planned burn (rising $5,000 a month) | 9.8 months | Below the board's 12-month target |
The dashboard shows the gap between simple runway (10.9 months) and runway on the planned path (9.8 months). Planned hiring has already used some of the margin, which is exactly the kind of insight a single burn number would miss.
Track burn
A simple monthly dashboard should show:
- Gross burn and net burn, with a 3-month average
- Cash balance and runway
- Forecast burn for the next six months
- Burn by category versus budget
- Burn multiple, if relevant
Include the burn rate in the cash dashboard. See the cash flow dashboard. Update runway when the forecast changes.
Common mistakes
- Confusing burn with loss.
- Using a single month. Average and track trends.
- Ignoring lumpy items such as annual insurance or inventory orders.
- Dividing cash by current burn when burn is expected to grow.
- Calling a company profitable because it has revenue while burn continues.
- Cutting costs that produce cash, such as sales and collections staff.
- Failing to update the forecast.
Related reading
For the survival side of burn, read cash runway: how to calculate it and how to extend it. For the warning signs of rising burn, see cash flow problems: 10 early warning signs. Startups will also find context in cash flow forecasting for startups.
FAQs
What is burn rate?
Burn rate is the speed at which a company spends its cash, usually per month. Net burn is cash out minus cash in.
What is the difference between gross burn and net burn?
Gross burn is total cash spending. Net burn is cash spending minus cash receipts, showing how fast the bank balance falls.
How do you calculate burn rate?
Add up all cash outflows for the month for gross burn, and subtract cash inflows for net burn. Use a three- to six-month average to smooth volatility.
How is burn rate related to runway?
Runway equals cash balance divided by net burn. It shows how many months the company can operate at the current rate, assuming burn stays constant.
Is a high burn rate always bad?
No. A high burn can be reasonable if it funds growth and the company has the runway and a plan. It becomes a problem when runway is short or spending does not produce results.
Keep reading
This article is for general information. It is not accounting, tax, legal or investment advice, and examples use illustrative numbers rather than client data. Confirm decisions that carry financial or legal consequences with a qualified professional.