Every company has a burn rate, whether or not it has raised venture capital. It is simply the amount of cash leaving the business each month — and paired with your bank balance, it tells you how much time you have.
Gross burn versus net burn
Gross burn is total monthly operating spending — salaries, rent, software, marketing. Net burn subtracts revenue: it is the true monthly cash deficit. Investors care almost exclusively about net burn, because it is the number that determines runway. A company with $80,000 of spending and $60,000 of revenue burns $20,000 a month, not $80,000.
How to compute it without fooling yourself
The clean way is a cash-flow statement, not the income statement. Accrual accounting puts expenses in the month they are incurred, but cash leaves in the month you actually pay — and for most startups the two are months apart, especially with annual software contracts and retainers paid in advance.
Pull three months of bank statements, sum the outflows and inflows, and divide by three. Then check the result against your bookkeeper's cash-flow report. If the numbers disagree badly, you have found a problem worth solving before your next board meeting.
What a good burn rate looks like
There is no universal number, but there are useful conventions. A common rule for venture-backed startups is to target a runway of 18 to 24 months after a fundraise — long enough to reach the next milestone, short enough to keep urgency. A seed-stage company burning $30,000 a month with $700,000 in the bank has 23 months of runway, comfortable by any standard.
The ratio that matters more than the absolute number is burn relative to growth: a company burning $100,000 a month that doubles revenue every six months is a different animal from one burning $30,000 with flat sales.
- Compute burn from cash flow, not accruals
- Target 18–24 months of runway after raising
- Report net burn to investors, not gross
- Recalculate monthly — burn drifts with hiring
Frequently asked questions
Is burn rate only relevant for startups?
No. Any company spending more cash than it brings in has a burn rate and a runway — most seasonal businesses do in their slow months. What differs is who is watching: a startup's investors track it monthly, while a bootstrapped company tracks it against its own savings.
How do I lower my burn rate quickly?
The levers in order of speed: pause discretionary marketing, renegotiate annual contracts to monthly, cut founder salaries (investors notice this one favourably), then reduce headcount last, since severance packages often cost more than three months of salary.
What is a 'default alive' company?
A company whose revenue covers its costs — zero net burn. Paul Graham's term. If you reach it you no longer need investors' permission to exist, which is why even venture-backed companies chase it as insurance.
Sources
Connectica provides information only, not financial, investment, legal or tax advice. Figures on this page are estimates and generalizations — confirm anything that matters with the relevant professional or authority.