TL;DR: Burn rate is the speed at which a company spends its cash reserves, measured monthly. It is the denominator in runway calculations and one of the first numbers lenders and investors ask for when evaluating a growth-stage company's financial position. Management should have a very precise understanding of their burn rate to avoid the risk of running out of cash.
Burn rate is the net amount of cash a company consumes each month, the difference between cash outflows (operating costs, capex, debt service) and cash inflows (revenue, collections). A company spending $400,000 per month and collecting $150,000 in revenue has a net burn rate of $250,000.
Gross burn is total monthly cash outflows, regardless of revenue. Net burn is the more meaningful figure as it accounts for revenue coming in and reflects how quickly the company is actually depleting its reserves.
Divide current cash on hand by monthly net burn to get cash runway in months.
Tracking burn rate, and changes in burn rate, should be a key metric for management. It can inform critical decisions, such as when to raise equity or cut costs, while there is still time to act.
What burn rate is acceptable? There is no universal threshold. The relevant question is whether the burn rate is sustainable relative to the company's runway and upcoming capital events. Investors and lenders focus on whether current burn is creating proportionate value.
Are there scenarios where burn rate should increase? Yes, for example, when a company is investing aggressively to grow its customer base and market share. However, burn rate and runway should always be tracked carefully to ensure the company is meeting its targets and has time to adjust if necessary.
Can venture debt reduce burn rate? No, venture debt adds cash to the balance sheet but does not reduce operating costs. It extends runway by increasing the cash balance. Interest payments are a monthly cash outflow that modestly increases burn, so the net runway extension depends on the size of the facility relative to the interest cost. However, many venture debt lenders are willing to fund burn, particularly when it is driven by strategic growth initiatives and management has a strong grasp of the company’s financial position.
Related terms: ARR · Bridge Financing
