The pace of cash consumption
Burn rate is how fast a company spends its cash reserves, usually stated monthly, and it is the number that, against cash on hand, determines runway. It is the speed at which the bank balance falls, and for a company not yet profitable it is the most consequential operating figure there is. Everything about how aggressively the company can invest, when it must raise, and how much time it has flows from the burn rate.Gross or net
Burn rate can be quoted two ways, and confusing them misleads:
- Gross burn rate: total monthly spending. - Net burn rate: spending minus revenue, the actual monthly cash loss.
Net burn is the figure that matters for runway, since it reflects the real decline in cash, but people sometimes say burn rate meaning gross. Always clarify which, because the two can differ enormously for a company with meaningful revenue.
Fast is not automatically bad
The instinct to treat a high burn rate as reckless misses the point. A high burn rate is healthy if it is buying proportional growth and the runway is adequate, and dangerous if the burn is not producing results or the runway is short. The real question is efficiency: is each dollar of burn generating enough growth to justify it, which is exactly what the burn multiple measures by relating burn to net new ARR. A company burning fast and growing fast, with plenty of runway, is executing a deliberate strategy; one burning fast with little to show and little runway is in trouble. Burn rate is the pace; whether that pace is right depends on what it is producing and how much time the cash allows, which is why it is always read alongside growth and runway rather than judged on its own.
Frequently Asked Questions
What is burn rate?
Burn rate is the pace at which a company consumes its cash, typically expressed as a monthly figure. It is the speed of cash depletion, which, divided into cash on hand, gives runway. Burn rate can be stated as gross burn (total spending) or net burn (spending minus revenue), so it is important to know which is meant.
How is burn rate used?
Primarily to calculate and manage runway. Cash on hand divided by monthly net burn rate gives the number of months a company can operate. Burn rate is the central operating number for any company not yet profitable, because it determines how much time the company has and how aggressively it can spend.
Is a high burn rate bad?
Not inherently. A high burn rate is fine if it is buying proportional growth and the runway is adequate, and dangerous if it is not. The question is never just how fast the company is burning, but whether the burn is producing enough growth to justify it, which the burn multiple measures.
Put these metrics to work
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