# Understanding Burn Rate: Definition, Types, and Calculation Examples

## What Is the Burn Rate?

The burn rate measures how quickly a startup consumes its cash reserves before reaching positive cash flow. Primarily used by companies not yet profitable, this rate, often expressed monthly, impacts how long a company can sustain operations before needing additional funding. Startups with high overhead costs, such as those in technology and life sciences, closely monitor their burn rate for strategic planning and investor discussions. Understanding gross and net burn rates, along with calculating a company's financial "runway," is essential for maintaining financial health and extending business longevity.

### Key Takeaways

*   Burn rate indicates how quickly a startup depletes its capital before becoming profitable.
*   Gross burn measures all monthly expenses, while net burn considers revenue minus costs.
*   A company's financial runway is the time it has before capital runs out, influenced by burn rate.
*   Reducing burn rate through cost cuts or increased revenue extends runway and investment potential.
*   Startups should aim for a burn rate that allows for three to six months of operating expenses.

![Burn Rate: The pace at which a new company not yet generating profits consumes its cash reserves.](https://www.investopedia.com/thmb/srIfccs4VChyfBeP9KQ8fPkiArU=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/burnrate.asp-FINAL-6fad0f1fa60044288421630803625fbc.png)

*— Investopedia / Jiaqi Zhou*

## How Burn Rate Influences Startup Success

The burn rate is used by [startup companies](https://www.investopedia.com/articles/personal-finance/041315/risk-and-rewards-investing-startups.asp) and investors to track the amount of monthly cash that a company spends before it starts generating income. A company's burn rate serves as a measure for its "runway," or how long it can operate before funds run out.

A company's runway would be 10 months if it has $1 million in the bank and spends $100,000 a month, derived as:

 Total Capital ÷ Monthly Operating Expenses = Runway  

That would be:

 $1,000,000 ÷ $100,000 = 10 months  

> **Important**
>
> A company can lower its gross burn rate by generating revenue or cutting costs, like reducing staff or finding cheaper production methods.

## Calculating Your Startup's Burn Rate: Gross vs. Net

There are two types of burn rates: net burn and gross burn. A company’s gross burn rate is simply the total amount of [operating costs](https://www.investopedia.com/terms/o/operating-cost.asp) it incurs in expenses each month. It's expressed as:

 Total Monthly Operating Costs = Gross Burn Rate  

The net burn rate is how much money a company loses monthly. It cannot exceed the gross burn rate, but it can be lower.

A technology startup's gross burn rate would be $30,000 if it spends $5,000 monthly on office space, $10,000 on monthly server costs, and $15,000 on salaries and wages for its engineers. Its net burn rate would be different, however, if the company is producing revenue. This would be calculated as:

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

Let’s say that the above company with a gross burn rate of $30,000 also has revenues of $20,000 a month from selling goods. Let’s put the [costs of those goods](https://www.investopedia.com/terms/c/cogs.asp) to the company at $10,000 a month. The company’s net burn rate would be $20,000, derived as:

 ($20,000 - $10,000) - $30,000 = -$20,000  

The company only loses $20,000 monthly, despite spending $30,000. This distinction changes the financial runway. The company's runway would be five months rather than three months if it had $100,000 in the bank. The longer period will affect both how the managers outline the company’s strategy and the amount of money that an investor might be [willing to put into the company](https://www.investopedia.com/articles/investing/011916/5-questions-ask-investing-startup.asp).

Typically, companies reduce the burn rate if it surpasses forecasts or if revenue falls short, regardless of funds in the bank. This requires rethinking the startup’s cost structure and usually means reducing staff and/or other major cost drivers, such as office lease, technology, and marketing.

## What Is a Good Burn Rate?

The general recommendation for a startup business is to have three to six months of expenses on hand. A good burn rate would fall between $33,334 (three months) and $16,667 (six months) if the company has $100,000 in the bank.

## How Is the Burn Rate Calculated?

Burn rates and be gross or net. The gross burn rate is simply the total amount of money spent each month. The net burn rate is the amount of money lost each month and takes into account any possible company revenue. It's calculated using the following formula: (Monthly Revenue - Cost of Goods Sold) - Gross Burn Rate = Net Burn Rate.

## Is Burn Rate the Same As Expenses?

It's the same if you're calculating the gross burn rate. You must also factor in whatever revenue the company may be generating if you want the net burn rate, however.

## The Bottom Line

Understanding burn rate is crucial for startups, as it indicates the speed at which they deplete their cash reserves. This metric helps managers and investors assess financial runway, determining the time left before operating capital is exhausted. If the burn rate is too high, companies must cut structural costs by reducing expenses in areas such as staffing, office space, and marketing. Lowering the burn rate is vital for extending financial runway and avoiding debt.  

> **Article Sources**
>
> 1.  Gynger. "[Net Cash Burn vs. Gross Cash Burn](https://www.gynger.io/resources/blog/net-cash-burn-vs-gross-cash-burn)."
>     
> 2.  American Express. "[Cash Flow Management: How Much to Keep in Business Cash Reserves](https://www.americanexpress.com/en-us/business/trends-and-insights/articles/cash-flow-management-how-much-cash-should-you-keep-in-your-business/)."