Explainer
Burn rate: what it measures and what it hides
Burn rate is how much cash you consume per month. Gross burn is everything going out; net burn is that minus revenue coming in. Both matter, and quoting only the flattering one is how teams surprise themselves.
- Gross burn
Total cash out per month, regardless of income. The number your cost base actually is.
- Net burn
Gross burn minus cash revenue. What your balance actually falls by.
- Use a three-month average
A single month is distorted by annual bills and payment timing.
- Watch the trend
Direction matters more than level; rising burn with flat revenue is the warning sign.
Calculating both
- Total all cash outflows for each of the last three months.
- Average them — that is gross burn.
- Total cash revenue received in the same months and average it.
- Subtract to get net burn.
- Divide current cash by net burn for runway in months.
Where burn hides
| Hidden cost | Why it is missed |
|---|---|
| Annual software renewals | Paid once, mentally excluded from the monthly figure |
| Employer taxes and benefits | Often quoted only as base salary |
| Payment processing fees | Netted off revenue rather than counted as cost |
| Cloud usage growth | Rises with usage, budgeted as a flat line |
| Contractor spikes | Treated as one-off every single quarter |
Reducing burn in order
- Audit and cancel unused software — routinely five to fifteen per cent of a small company's spend.
- Renegotiate the largest three vendor contracts at renewal, with a real alternative in hand.
- Shift annual prepayments to monthly where cash is tighter than the discount is valuable.
- Slow hiring before cutting staff; a delayed start date is far cheaper than a redundancy.
- Only then reduce headcount, and do it once rather than in repeated small rounds.
Frequently asked questions
What is burn rate?
The amount of cash a business consumes each month. Gross burn is total outflow; net burn subtracts cash revenue received.
What is a good burn rate?
There is no universal figure — judge it against runway and progress toward your next milestone. Under 18 months of runway with rising burn is the usual warning zone.
Should I use gross or net burn for runway?
Net burn when revenue is reliable, but always know your gross figure, because revenue is the assumption most likely to slip.
How often should I review burn?
Monthly on a three-month rolling average, so one large annual bill does not distort the picture.
Know both numbers, watch the trend
Monthly outflow tracking and reports, free forever.