Burn rate is the amount of cash a company uses each month beyond what it earns, showing how quickly its money is being depleted. Gross burn is total spending; net burn is spending minus revenue.
Why it matters
Burn rate shows how long a company can operate before it needs more revenue or funding. Dividing cash on hand by net burn gives the runway in months. Tracking it helps teams decide when to hire, cut costs or raise money. Burn rate is a snapshot, so most teams watch the trend over several months and compare it with revenue growth to see whether the gap is closing.
Example
A company spends 50,000 USD a month and earns 20,000 USD. Gross burn is 50,000 and net burn is 30,000. With 180,000 USD in the bank, its runway is 180,000 divided by 30,000, or 6 months.
Common mistakes
- Mixing up gross and net burn.
- Ignoring upcoming one-off payments, such as annual software bills.
- Assuming revenue will grow fast enough to cover the gap.
Related
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