Burn Rate

Burn rate isolates the cash dimension of business performance, separate from accounting profit. A business can be profitable on the P&L but have a high net burn because of timing — AR builds faster than collections, or major capital expenditures aren't reflected in operating expense. Conversely, a business with accounting losses can have low burn if depreciation makes up most of the loss. Burn rate is what actually matters for survival because it directly determines how much time the cash balance buys. Owners track burn weekly during transition periods (rapid growth, new hires, downturns) and monthly during steady-state.

Formula

Gross Burn Rate = Total Monthly Cash Outflows
Net Burn Rate = Monthly Cash Outflows − Monthly Cash Inflows

Why It Matters for Small Businesses

Burn rate translates the abstract idea of "are we spending too much?" into a concrete monthly number. When burn rises faster than revenue, runway shrinks regardless of how profitable the P&L claims to be. Tracking burn separates two questions that owners often conflate: "is the business growing?" (revenue) and "can the business survive?" (burn vs cash). Both matter, but in a downturn or fast-growth phase, the survival question dominates — and burn rate is the answer.

Frequently Asked Questions

What's the difference between gross burn and net burn?

Gross burn is total cash outflows. Net burn subtracts cash inflows. A SaaS startup with $50K of expenses and $20K of MRR has $50K gross burn and $30K net burn. Net burn is usually the more useful number because it determines how long the cash balance lasts.

Is burn rate the same as operating loss?

No. Operating loss is an accounting measure — it includes non-cash items like depreciation and excludes timing effects like AR build-up. Burn rate is cash-only. A business can have an accounting profit and still burn cash (if AR is growing faster than collections), or have an accounting loss and zero burn (if the loss is mostly depreciation).

How often should I check burn rate?

Weekly during transitions (rapid hiring, post-fundraise, slow season, after major changes). Monthly during steady-state. The signal that matters is the trend — burn moving up over several months is almost always a structural change, not noise, and warrants action before runway compresses materially.

Can a profitable business have a burn rate?

Yes. "Profitable" on the P&L can coexist with negative cash flow if AR is growing faster than cash collection, if inventory is building, or if major capital expenditures aren't reflected as expenses yet. This is the classic "profitable on paper, broke in practice" situation — and it's specifically what makes tracking burn (cash) separately from profit (accounting) so important.

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