Burn Rate Explained: How to Calculate It and What It Means

Gross burn vs net burn

Gross burn is total cash out in a month - every dollar you spend. Net burn is gross burn minus revenue - the net amount of cash the business consumes. A business spending $300K per month with $100K in revenue has a $300K gross burn and a $200K net burn. Net burn is the number that determines runway.

Gross burn is the total cash leaving the business each month - payroll, rent, software, contractors, everything. Net burn is gross burn minus revenue. For pre-revenue companies they are the same. For companies with meaningful revenue, net burn is the more useful number because it reflects actual cash pressure.

Most founders quote net burn in investor conversations because it is smaller. Most investors want both numbers because the gap tells them about the business quality. A company with $500K gross burn and $100K net burn has revenue covering 80% of its costs. A company with $500K gross burn and $450K net burn has a revenue problem, even if the net burn is similar in absolute terms.

How to calculate runway

Runway is current cash balance divided by monthly net burn. If you have $1.2M in the bank and a $200K monthly net burn, you have six months of runway. The challenge is that burn and revenue both change month to month, so a single runway calculation is a snapshot, not a forecast. A rolling 3-month average burn rate gives you a more stable and useful number.

Runway is simply cash divided by net burn. $2M cash and $150K net burn is 13 months of runway. Easy math, but easy to mis-apply. Using last month's burn when last month was unusual (missing hire, delayed vendor payment, one-time cost) gives you a runway number that is not representative.

The right approach: use trailing 3-month average net burn, but also model forward burn based on planned hires and commitments. If you are planning to add 5 engineers in the next quarter, your burn is going to increase. Runway calculations using trailing burn will overstate your position if you are growing the cost base.

What investors mean when they ask about burn

When an investor asks about your burn rate, they're usually asking three things: how much cash are you consuming, how long can you operate without new money, and how efficiently are you converting investment into growth? A high burn rate isn't automatically bad if revenue is growing fast enough to justify it. A low burn rate isn't automatically good if it means you're not investing in growth. Context matters.

When investors ask about burn, they are testing multiple things. How well do you know your numbers (can you quote both gross and net quickly). Are you controlling spend (is burn trending up or down). Is the burn justified (is it producing revenue growth). The number itself matters less than how you talk about it.

A good answer to "what is your burn" includes context: current monthly burn, what is driving it, how it has trended over the last 6 months, and what you expect going forward. "We burn about $180K per month, up from $120K six months ago driven by engineering hiring. We plan to hold it flat through Q2 while the new hires ramp." That is a board-level answer.

Managing burn proactively

Burn management isn't just about cutting costs. It's about understanding the relationship between spending and growth - which expenses are generating returns and which aren't. The most important thing is to know your burn rate in real time, not find out at the end of the month when the bank statement arrives. Good bookkeeping and a weekly cash position review give you that visibility.