cashflow
Burn Rate
Monthly net cash outflow. How fast you're depleting reserves.
Definition
Burn rate is monthly cash outflow minus cash inflow. If you spend $80K/month and bring in $50K, your net burn rate is $30K/month. Gross burn is the $80K total outflow. Both matter for different decisions: gross burn shows fixed-cost exposure (what could be cut), net burn shows actual depletion of reserves. Even profitable businesses have a 'burn' in tight months - the metric is universally relevant, not just for startups.
Gross burn versus net burn in practice
Gross burn is total monthly cash outflow regardless of inflow. Net burn is gross burn minus monthly cash receipts. The distinction matters because they answer different questions. Gross burn answers: what is my fixed exposure if revenue goes to zero next month? Net burn answers: how fast am I actually depleting the bank account today? A US startup with 100K gross burn and 70K monthly revenue has 30K net burn and 12 months of runway on 360K in the bank, but if a key customer churns and revenue drops to 30K, runway compresses to 5 months overnight. Always model both at three revenue scenarios: current, current minus 20 percent, and current minus 50 percent.
What founders forget to include in burn
Five categories regularly missed. First, quarterly estimated tax payments to the IRS - even unprofitable businesses owe payroll tax, sales tax, and state minimum tax. Second, annual SaaS renewals that hit in one month and look like a spike but are real burn averaged across 12 months. Third, contractor invoices with 30 to 60 day payment terms; the work was done in March, the cash leaves in April or May. Fourth, founder personal expenses run through the business that you forget are not optional. Fifth, deferred payroll, bonuses, or commissions that accrue silently. A clean burn calculation should be cash leaving the bank account, period, not what your P&L says.
Reducing gross burn fast
When you need to cut burn quickly, work the list in this order to minimize damage. SaaS audit (typical recovery: 5 to 15 percent of OpEx within 30 days). Marketing spend pause on channels under 3x ROAS. Renegotiate office lease or move to coworking. Cut contractor hours before staff hours. Renegotiate vendor payment terms to net 60 or 90. Finally, payroll reductions, starting with a salary cut for the founder and senior staff before any layoffs. Across-the-board layoffs as a first move are a sign of poor planning and cost morale you cannot rebuild. Avoid if you can wait 60 days and do targeted cuts instead.
When higher burn is correct
Burn is not virtue or vice; it is the price of speed. A bootstrapped consultancy at 5K monthly burn has no growth ceiling problems but also no leverage. A venture-backed SaaS at 200K monthly burn is buying market position. The right burn level depends on three things: how much capital you can deploy, how confident you are in the unit economics (LTV to CAC ratio), and your willingness to course-correct fast. The rule of thumb in US SaaS: if LTV to CAC is above 3 and CAC payback is under 18 months, every extra dollar of burn aimed at growth is creating value. Below those thresholds, more burn destroys value.
FAQ
Is positive net cash flow a 'negative burn'?
Technically yes. When a profitable business generates more cash than it spends, net burn is negative, which means the cash position is growing rather than shrinking. Operators sometimes call this 'default alive' (from Paul Graham's framing) - if nothing changes, the business survives indefinitely. The opposite is 'default dead', where current trajectory leads to bankruptcy unless you raise capital or fundamentally change the model.
Should I include credit card debt repayment in burn?
Yes, the principal portion is real cash leaving. Interest is already in OpEx and flows to operating profit, but principal does not appear on the P&L. If you are paying down 5K per month on a business credit card balance, that is 5K of burn that operating profit hides. Same logic applies to SBA loans, vendor debt, and any other principal repayments.
How do US lenders look at burn rate?
Banks and SBA lenders care about debt service coverage ratio (DSCR), which is roughly EBITDA divided by total annual debt payments. They want DSCR above 1.25. High burn rate with low revenue means EBITDA is too small or negative, which kills DSCR. If you are planning to apply for a line of credit or SBA loan, get burn under control 6 to 12 months before applying so the trailing financials look healthy.
What is a 'good' burn multiple?
Burn multiple equals net burn divided by net new ARR added in the same period. A burn multiple under 1 means you added more recurring revenue than you burned, which is excellent. 1 to 2 is healthy. 2 to 3 is acceptable for early-stage. Over 3 is a warning. This metric, popularized by David Sacks, is the modern standard for evaluating capital efficiency in US SaaS companies.
Does burn rate include depreciation?
No. Burn rate is a cash concept. Depreciation is a non-cash expense that reduces P&L profit but does not reduce the bank account. When calculating burn, work from the cash flow statement or the bank account, not the income statement. This is also why EBITDA (which adds back depreciation) is often closer to cash than net profit for asset-heavy businesses.
In your business
- →Compare to bank balance to get runway in months
- →Track week-over-week to catch acceleration early
- →When tightening, reduce gross burn first (cut costs), not just net burn (chase revenue)