Burn rate

What it means

Burn rate expresses how fast a company is burning through cash. Gross burn is all monthly spending; net burn is the difference between spending and receipts, meaning how much the cash balance falls each month.

The term is used mainly for start-ups that deliberately spend more than they earn in order to grow fast and cover the loss with investors’ money. For them burn rate is a core metric, and together with the cash balance it gives the runway.

Burn rate is measured on cash movements, not on profit. A company can report an accounting profit and still have a high burn rate if it is investing in assets, funding inventory or waiting for customers to pay, so it is tracked from cash flow rather than the income statement.

How it works in practice

For clients in a growth phase we prepare a monthly cash flow statement split into operating, investing and financing activities. It shows burn rate precisely, without distortion from one-off payments such as an annual insurance premium or a VAT settlement.

Burn rate is driven mainly by fixed costs: salaries, rent and software. When planning the next round we therefore work with a 12 to 18-month forecast and scenarios showing how burn changes with new hires or slower sales.

Investors, whether a business angel or a venture capital fund, look at burn rate in every report. An unexpected rise without matching revenue growth is a warning to them and can delay further funding.

What to watch out for

The most common mistake is working out burn from the average of a good quarter and overlooking seasonality, late invoices or tax settlements. The company then finds its cash runs out two months earlier than planned and cannot close the new round in time.

As cash runs low, the director must also watch the statutory duties. If equity falls relative to liabilities, the company may find itself in a state of crisis, in which repaying shareholder loans is restricted, and funding has to be structured with care, for example as a convertible loan from an investor.