How To Calculate Burn Rate

Burn rate is the speed at which a business consumes its cash, expressed per month. There are two versions of it, and mixing them up is the single most common error on the topic. Gross burn counts everything leaving the account: 90,000 per month in the example used throughout this page. Net burn subtracts what comes in: 90,000 minus 40,000 leaves 50,000 per month. Runway then divides the cash balance by that rate, so 500,000 divided by 50,000 gives 10 months. Everything else worth saying here is a refinement of those two sentences.

Gross burn answers a different question from net burn, and the gap between them is not cosmetic. At 90,000 of monthly outflow with no revenue at all, 500,000 of cash lasts 5.5556 months. With 40,000 of monthly revenue actually collected, the same balance lasts 10 months — 80% longer, because revenue covers 40,000 of the 90,000 and only 50,000 has to come out of the bank. Gross burn remains the honest worst case, because it is what your runway collapses to if every customer stops paying tomorrow. Reporting both figures side by side is standard practice for exactly that reason.

Cash is a stock and burn is a flow, and runway is the ratio of one to the other. A balance of 500,000 against a flow of 50,000 per month gives 10 months; double the balance to 1,000,000 and runway doubles to 20 months; halve the flow to 25,000 and it doubles again. This is the same structure as the stock-and-flow distinction that governs a net worth calculation, with one important difference: net worth is a snapshot of what exists today, whereas runway is a projection that assumes the flow stays where it is. That assumption is the weak point, and it is where the rest of this page spends its time.

Revenue in a burn calculation means cash collected, not revenue invoiced or booked. A month in which 55,000 is billed but only 40,000 reaches the bank contributes 40,000 to this calculation; the missing 15,000 is a working capital question rather than income. Contracts signed but not yet performed contribute nothing until the cash actually moves. A customer prepaying 15,000 for three months of service adds 5,000 a month, lifting collected revenue from 40,000 to 45,000 and lowering net burn from 50,000 to 45,000 for that quarter — while counting the whole 15,000 up front would show a single flattering month of 35,000 followed by a return to 50,000.

Committed funding is not cash, and runway must be computed on the balance you could spend this afternoon. A signed term sheet for 2,000,000 changes nothing until the money is in the account; adding it to 500,000 would show 50 months of runway at net burn of 50,000 instead of 10 — a fivefold difference resting on an event that has not happened. The disciplined approach is to run two scenarios: one on cash in the bank, which is the number that governs payroll, and one including only tranches that have actually landed. Rounds also take months to close, and every month spent fundraising is a month of payroll at 90,000 of outflow.

Lumpy annual costs are the most reliable way to discover that runway was overstated. Suppose 150,000 of one-off items sit inside the year: 50,000 for an insurance renewal, 50,000 of tax and 50,000 of severance. Each 50,000 payment costs exactly one month of runway at net burn of 50,000, so the three together remove three months from the ten-month figure and leave seven. Smoothing them is more useful than remembering them late: spreading 150,000 across twelve months adds 12,500 per month, lifting net burn from 50,000 to 62,500 and shortening runway from 10 months to 8 months. The smoothed figure is the one to plan against, because it is the one that reaches the bank.

Runway moves in inverse proportion to burn, which makes modest changes to the denominator surprisingly powerful. Cut net burn by 20%, from 50,000 to 40,000, and runway rises from 10 months to 12.5 — 2.5 months gained, a 25% extension bought with a 20% reduction. Raise net burn by 20% instead, to 60,000, and runway falls to 8.3333 months. The reciprocal shape also means timing matters: a 10,000 monthly saving sustained across the full 10-month runway returns 100,000 of cash, whereas the same saving found in month nine returns only 10,000.

Net burn of zero is the break-even point, and it is worth being precise about what that means in a cash sense. If collected revenue reaches 90,000 per month against 90,000 of expenses, nothing is being drawn from the balance and runway stops being a meaningful division at all. Push revenue to 100,000 and net burn becomes negative 10,000 per month, which describes a business adding cash rather than spending it. The break-even page treats the unit-economics version of this threshold; burn rate is the cash version, and the two can disagree whenever invoicing and collection drift apart.

Runway is a number that expires. Computed today at 500,000 and 50,000 it reads 10 months; three months of the same burn leaves 350,000, and the honest figure at that point is 7 months rather than the 10 written into the board pack. Recomputing monthly with identical rules costs minutes and prevents the worst version of the error, which is discovering with six weeks left that the cash was always going to run out sooner. A workable discipline is to treat six months as the point at which raising or cutting begins in earnest: on the figures here that arrives in month four, when 300,000 remains and runway has fallen to six.