Burn rate measures how quickly a company spends its cash reserves, typically expressed as a monthly rate. It’s particularly important for startups and growing companies that may operate at a loss while building their business, showing how long they can sustain operations before needing additional funding.
The gross burn rate represents total monthly cash spending, while net burn rate indicates the amount of cash the company loses each month after accounting for revenue. For example, if a company spends $500,000 monthly and generates $300,000 in revenue, its net burn rate is $200,000.
Companies and investors use burn rate to calculate the “runway” – the time remaining before cash reserves are depleted. A company with $2 million in cash and a monthly burn rate of $200,000 has a 10-month runway. This metric helps management make strategic decisions about cost control, fundraising timing, and growth investments, while investors use it to assess a company’s financial health and sustainability.
