Financial Glossary
Burn Rate
Burn rate is the rate at which a company spends cash reserves, typically measured monthly. Gross burn rate is total monthly cash outflows (all operating expenses paid in cash). Net burn rate is gross burn minus any revenue collected in cash during the same period. If a startup spends $200,000/month and collects $50,000 in subscription revenue, net burn is $150,000/month. Runway is calculated by dividing current cash balance by net burn: $1,500,000 / $150,000 = 10 months of runway. Burn rate is the primary operational urgency metric for pre-profitability companies because it directly determines when additional capital must be raised or expenses cut.
Problem & Application
A SaaS startup raised $2,000,000 in seed funding. Monthly expenses: $80,000 salaries, $20,000 cloud infrastructure, $15,000 sales and marketing, $10,000 G&A = $125,000 gross burn. Monthly revenue collected: $35,000 MRR. Net burn = $90,000/month. Runway = $2,000,000 / $90,000 = 22 months. The founders target raising a Series A in 14 months, leaving an 8-month cushion for a slow fundraising process. If burn increases to $140,000 gross after two new hires, net burn rises to $105,000 and runway compresses to 19 months -- the cushion shrinks to five months, which is tight for a Series A process. Founders should model burn scenarios (base, downside, worst case) quarterly. For campground and STR operators, burn rate applies during pre-opening construction or shoulder-season periods when expenses continue but revenue stops. Maintaining a cash reserve equal to three to five months of operating expenses is a standard liquidity floor.
In Short
Burn rate is a vital metric for managing cash flow, especially for early-stage businesses and startups navigating growth and funding cycles.