Burn rate

Definition

Burn rate is the rate at which a company uses up its cash reserves, normally expressed as a monthly figure. Gross burn is total monthly cash spend; net burn is spend minus any cash coming in, which is the more telling number because it shows how fast the balance is actually falling. It is most associated with early-stage and growth businesses operating at a loss, but any company spending faster than it earns has a burn rate.

Why it matters

Burn rate is meaningless on its own and vital next to two other figures. Divide cash reserves by net burn and you get runway — the number of months before the money runs out at the current pace. A high burn with a short runway is a flashing light: the business needs to raise funds, cut costs or grow revenue before it hits zero. Lenders and investors look at burn to judge how urgently a company needs money and how disciplined it is with what it has. Where the pressure is a timing gap rather than genuine over-spend, a working capital facility can bridge it; where it is structural, the answer is margin, not borrowing. Keep a forward view with a cash flow forecast.