Burn rate

Burn rate measures how quickly a company depletes its cash balance, typically stated per month. Gross burn is total cash spent in the period, regardless of income; net burn subtracts cash coming in, usually revenue, from gross burn, so it reflects the actual net drain on the bank account. Dividing the current cash balance by net burn gives runway, the number of months before cash runs out at the current spending pace.

Burn rate differs from an accounting loss on the income statement because it tracks cash movements, not accrued revenue and expenses; non-cash items like depreciation affect reported profit but not burn, while cash-heavy events like a large upfront prepayment can affect burn without appearing on the income statement in the same period. It is closely tied to working capital timing, since collections and payments shift when cash actually moves even if revenue and costs are recognized elsewhere.

Burn rate matters most for early-stage and venture-backed companies not yet generating enough revenue to cover costs, where it directly determines how much time remains before the next fundraise or before reaching profitability. A common pitfall is calculating burn from a single unusual month, such as one with a large one-time payment, instead of a smoothed trend from a rolling forecast, which can make runway estimates swing wildly and mislead planning.