Burn Rate Explained: Gross vs Net Burn for Startups
Your burn rate is how fast you're spending money. But there's more nuance to this metric than most founders realize. Here's everything you need to know.
Quick Definition
Burn rate is the rate at which a company spends its cash reserves before generating positive cash flow. It's typically measured monthly.
"What's your burn rate?" is one of the first questions any investor will ask. It's a proxy for how efficiently you're spending money and how much runway you have.
Yet in our work as fractional CFOs, we see founders consistently misunderstand or miscalculate this fundamental metric. Some quote gross burn when they should quote net burn. Others forget to account for revenue timing or upcoming expenses.
Let's clear up the confusion once and for all.
What Is Burn Rate?
Burn rate measures how quickly your startup consumes cash. It answers the question: "How much money are we spending each month?"
This matters because most startups are unprofitable in their early years. You're investing in product development, hiring, and growth before revenue catches up with expenses. Your burn rate tells you how long your cash will last at the current pace.
Burn rate connects directly to runway calculations:
Runway = Cash Balance ÷ Monthly Burn Rate
If you have $1 million and burn $100,000 per month, you have 10 months of runway. Simple math, but the burn rate input needs to be accurate.
Gross Burn vs Net Burn: What's the Difference?
There are two ways to measure burn rate, and each tells you something different about your business.
Gross Burn
Total monthly operating expenses, regardless of revenue.
Gross Burn = All Monthly Operating Expenses
Example: You spend $150K/month on salaries, rent, software, marketing, etc. Your gross burn is $150K.
Net Burn
Cash consumed after accounting for revenue.
Net Burn = Total Expenses - Total Revenue
Example: You spend $150K but bring in $50K revenue. Your net burn is $100K.
A Visual Example
Let's look at a startup's monthly financials:
Monthly Financial Summary
In this example:
- Gross burn: $150,000/month (total expenses)
- Net burn: $100,000/month (expenses minus revenue)
How to Calculate Burn Rate Accurately
For Gross Burn
Add up all your monthly operating expenses. Include:
- Payroll (salaries, benefits, payroll taxes)
- Rent and utilities
- Software subscriptions
- Marketing and advertising
- Professional services (legal, accounting)
- Travel and entertainment
- Insurance
- Any other operating costs
Important: Don't include one-time capital expenditures (equipment purchases, security deposits) in your monthly burn calculation. These distort the number. Track them separately.
For Net Burn
The cleanest way to calculate net burn is the "cash method":
Net Burn = Starting Cash Balance - Ending Cash Balance
Look at your bank balance at the start of the month and the end. The difference is your net burn (or net gain if you're cash flow positive).
Use a 3-Month Average
Never use a single month's burn rate for important decisions. Month-to-month variations can be significant:
- Quarterly payments (insurance, software contracts)
- Seasonal revenue fluctuations
- One-time expenses or windfalls
- Collection timing on receivables
Example: 3-Month Average
October net burn: $85,000
November net burn: $120,000 (quarterly AWS bill hit)
December net burn: $95,000
Average: ($85K + $120K + $95K) ÷ 3 = $100,000/month
Which Metric to Use When
| Situation | Use This Metric | Why |
|---|---|---|
| Calculating runway | Net burn | Shows actual cash consumption |
| Investor conversations | Both | Net burn for runway, gross burn for cost structure |
| Pre-revenue startup | Gross burn | Gross and net are the same |
| Cost-cutting analysis | Gross burn | Identifies all expense categories |
| Scenario planning | Both | Model different revenue scenarios |
What's a Healthy Burn Rate?
There's no universal "good" burn rate—it depends on your stage, industry, and growth trajectory. But here are some benchmarks:
Pre-Seed / Seed Stage
Typical monthly burn: $30K - $80K
Small team, focused on product-market fit. Runway of 18-24 months is ideal.
Series A Stage
Typical monthly burn: $100K - $300K
Growing team, scaling sales and marketing. Runway of 18+ months preferred.
The Burn Multiple
A more sophisticated way to evaluate burn rate is the "burn multiple"—how much you're burning relative to new revenue growth:
Burn Multiple = Net Burn ÷ Net New ARR
- < 1x: Excellent efficiency (adding more revenue than you're burning)
- 1-2x: Good efficiency
- 2-3x: Acceptable for early-stage
- > 3x: May need to improve efficiency
How Investors View Burn Rate
When investors ask about burn rate, they're trying to understand several things:
Capital Efficiency
Are you spending wisely? A lower burn rate with strong growth signals efficient capital deployment.
Runway and Timing
How long until you need more capital? They want to know if you'll hit milestones before running out of money.
Cost Structure
Where is the money going? Heavy sales spend signals growth focus; heavy R&D signals product investment.
Be prepared to discuss both gross and net burn. Sophisticated investors will want to see the full picture of your spending and how it relates to your growth trajectory.
Strategies to Reduce Burn Rate
If your burn rate is too high—or you need to extend runway—here are the main levers. For a comprehensive guide, see our article on 12 ways to extend your runway.
Quick Wins
- • Audit software subscriptions
- • Renegotiate vendor contracts
- • Reduce office space
- • Cut marketing experiments
Larger Moves
- • Slow or freeze hiring
- • Restructure team
- • Reduce salaries (carefully)
- • Pivot to profitable customers
The Other Side: Increasing Revenue
Remember that net burn = expenses - revenue. Sometimes the best way to reduce net burn isn't cutting costs—it's increasing revenue. Consider accelerating deals, raising prices, or adding revenue streams.
Common Burn Rate Mistakes
Confusing Gross and Net
Telling investors your burn is $100K when it's actually $150K (gross) will come back to bite you. Be clear about which metric you're discussing.
Excluding Future Commitments
If you just signed two offer letters, your burn is about to increase. Factor in committed hires, not just current headcount.
Forgetting Periodic Expenses
Annual insurance premiums, quarterly tax payments, and yearly software renewals can spike individual months. Use averages.
Counting Revenue Before Collection
Revenue booked isn't revenue collected. If you have 60-day payment terms, that affects your actual cash position. Use cash-basis for burn calculations.
Key Takeaways
- 1Gross burn = total expenses; Net burn = expenses minus revenue
- 2Use net burn for runway calculations, but know both numbers
- 3Always calculate using a 3-month average to smooth variations
- 4Factor in committed expenses (signed offers, contracts) not yet hitting the books
- 5Investors will ask about burn—be prepared to discuss both metrics
Get Your Burn Rate Under Control
Eagle Rock CFO helps seed and Series A startups understand their financials, optimize spending, and build sustainable growth. Get the clarity you need to make confident decisions.
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