Burn Rate

Many young companies spend more than they earn while they build their products and customer base. The burn rate shows how quickly their cash is being used up.

There are two common versions. Gross burn is total monthly spending on salaries, rent, marketing and other costs. Net burn is gross burn minus monthly revenue, showing how much cash is actually lost each month.

For example, a start-up that spends 400,000 a month and brings in 150,000 of revenue has a gross burn of 400,000 and a net burn of 250,000.

Burn rate is closely watched by founders and investors, because it determines how long the company can keep operating before it needs more money. A high burn rate may be acceptable if the company is growing quickly and has plenty of funding, but it becomes dangerous if fundraising becomes harder.

Companies can reduce their burn rate by cutting costs, delaying hiring or increasing revenue. Investors often look at burn rate alongside growth, asking whether the spending is producing enough progress to justify it.

Note: Cash burn means the same as burn rate.