Burn Rate

What Is a Burn Rate?

A burn rate is the speed at which a company spends its cash reserves. It is usually measured per month and describes money leaving the business faster than it comes in. The term is most common when discussing early-stage startups that spend heavily on product development, staff, and marketing before they earn steady revenue. Because these companies often have negative free cash flow, burn rate helps readers gauge how long the business can keep operating before it needs new funding.

How It Is Calculated

There are two common versions. The gross burn rate is the total cash a company spends in a month. The net burn rate subtracts the cash it collects from customers during the same month.

Net burn rate = Monthly cash outflows - Monthly cash inflows

Investors often pair this figure with cash runway, which estimates how many months the remaining cash will last at the current net burn rate. A simple version divides the cash on hand by the monthly net burn.

An Illustrative Example

Suppose a company has a certain cash balance, spends more than it collects in revenue during a month, and therefore has a positive net burn. Dividing its cash balance by that monthly net burn gives a rough runway. Because spending and sales change over time, the estimate is only a snapshot and can shift quickly.

Why It Matters to Investors

Burn rate shows how quickly a company is consuming its capital, which can signal financing risk. A high burn rate is not automatically a problem if revenue is growing rapidly or the spending is building long-term value, but it can mean the company will soon need to raise money through new equity financing or borrowing. New shares issued to raise funds may lead to dilution for existing shareholders.

Burn rate also has limits. It does not measure profitability, and it can be distorted by one-time payments, timing differences, or cash from financing activities. For that reason, analysts usually read it alongside operating cash flow and the company's overall balance sheet.