What Is Burn Rate?
Burn rate is how fast a company, usually a young startup, spends its cash reserves before it starts making a profit. It is often measured per month, like spending $100,000 a month. The lower the burn rate, the longer a company can survive on the money it already has.
How does burn rate work?
Every young company starts with a pile of cash, usually raised from investors, and that pile only lasts so long. Burn rate measures how quickly it shrinks. If a business spends more than it brings in, it is "burning" cash, and the speed of that spending tells you how much time it has left before the money runs out.
The figure is almost always quoted per month. A company "burning $200,000 a month" is spending that much more than it earns every month. On its own that number means little. What matters is how it compares to the cash still in the bank, because together they reveal how long the company can keep going.
The Analogy
A bucket with a hole in it
Picture a bucket of water with a hole in the bottom. The water is the company's cash, and the hole is its spending. Burn rate is how fast the water drains out. A bigger hole empties the bucket sooner. What really matters is not just the size of the hole but how much water is left, because together they tell you how long before the bucket runs dry. In a company, that remaining time is called the runway.
How do you calculate burn rate and runway?
The math is refreshingly simple. Take the cash a company has and divide it by how much it burns each month, and you get its runway: the number of months it can survive before it needs more money.
| Amount | |
|---|---|
| Cash in the bank | $1,200,000 |
| Net burn per month | $200,000 |
| Runway | 6 months |
Note: This is a simplified, hypothetical example created strictly for educational purposes.
People often split this into two versions. Gross burn is the total cash going out the door each month. Net burn is that spending minus any money coming in, so it reflects the real shortfall. Net burn is the one that decides how fast the runway shrinks.
Why does burn rate matter?
For a company that is not yet profitable, burn rate is close to a measure of life expectancy.
Why It Matters
It sets the clock for raising money
Runway tells a startup exactly how long it has to either become profitable or raise more cash, often from venture capital investors. Fundraising takes months, so founders watch their burn rate constantly to make sure they start looking for money long before the bucket runs dry. A company that ignores its burn rate can find itself out of cash with no time left to fix it, which is one of the most common ways young companies fail.
What does a high burn rate signal?
A high burn rate is not automatically a problem. Spending aggressively to grow can be a deliberate strategy. The danger is spending fast without the results, or the funding, to back it up.
Real-World Example
WeWork burns through billions
The office-rental company WeWork became a famous warning about unchecked burn. It expanded at enormous speed while losing huge sums of money, and when it tried to go public in 2019, investors balked at how fast it was burning cash with no clear path to profit. The planned offering was pulled, its valuation collapsed from around $47 billion, and its chief executive stepped down.¹ The cash was flowing out far faster than the business could justify.
The TL;DR for Burn Rate
At a Glance
Key Takeaways
- Burn rate is how fast a company spends its cash reserves, usually measured per month.
- Dividing cash by burn rate gives the runway: how many months the company can survive before needing more money.
- It is critical for startups, because it sets the deadline to become profitable or raise more cash.
- A high burn rate is not always bad, but burning fast without results or new funding is a common cause of failure.
Sources & References
Specific Citations
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