Net Burn Rate

What Is Net Burn Rate?

Net Burn Rate represents how much money a company is losing (or gaining) each month after considering both expenses and revenue. It’s like your actual cash flow scorecard, showing the real rate of cash depletion.

What’s Included? 💼

Net Burn Rate calculation includes:

• All Expenses (Gross Burn):

  • Operating Expenses:

    • Employee costs (salaries, benefits, etc.)

    • Facility costs (rent, utilities)

    • Technology costs

    • Marketing and sales costs

    • Administrative costs

  • Non-Operating Expenses:

    • Debt payments

    • Capital expenditures

    • One-time costs

• Minus All Revenue:

  • Sales revenue

  • Service revenue

  • Subscription fees

  • Interest income

  • Other income

👆 By the way, an interesting fact: A negative net burn rate (meaning you’re gaining cash) is sometimes called a “negative burn” or “positive  cash flow.” Many successful startups aim to achieve negative burn before their cash reserves run out!

How to Calculate Net Burn Rate

The formula is:

Net Burn Rate = Gross Burn Rate – Monthly Revenue

Example breakdown:

• Gross Burn: $200,000

  • Operating Expenses: $150,000

  • Non-Operating Expenses: $50,000

• Monthly Revenue: $150,000

• Net Burn Rate = $50,000/month

Why It Matters

Understanding net burn rate is crucial for:

1. Calculating true runway length

2. Planning fundraising timing

3. Making growth decisions

4. Evaluating business sustainability

5. Setting revenue targets

6. Managing cash reserves

Net vs. Gross Burn

Key differences:

1. Net Burn:

   • Shows actual cash depletion

   • Includes revenue impact

   • More accurate for runway calculations

   • Reflects business performance

2. Gross Burn:

   • Shows total spending

   • Ignores revenue

   • Used for expense planning

   • Indicates operational scale

Pro tip: Many successful companies maintain a “burn multiple” – the ratio of net burn to revenue growth. A lower multiple (ideally below 1) suggests efficient growth.

Managing Net Burn

To improve net burn:

1. Increase revenue

2. Optimize pricing

3. Improve collections

4. Control expenses

5. Balance growth investments

6. Monitor unit economics