How to calculate your business burn rate

If you're monitoring your cash closely, you need to know how to calculate burn rate. The following guide explains exactly what burn rate is and how to calculate it accurately.

What is the burn rate

Burn rate refers to the pace at which your business spends its cash reserves each month. It is often expressed in terms of monthly cash usage, particularly for pre‑profit startups and early‑stage businesses. Tracking cash burn rate helps forecast when operating cash will run low, allowing you to act before it becomes critical.

Tracking burn rate regularly also helps identify patterns in spending. For example, certain months may show higher costs due to seasonal marketing or product launches. Understanding these patterns can improve your financial planning.

Why does burn rate matter

Knowing your burn rate matters because it shows the length of time your business can continue running before funds are depleted. A clear view in this regard helps you avoid surprises and make smarter spending, hiring, and funding decisions. This metric guides planning by linking cash inflows and outflows in a simple signal you can act on.

Monitoring burn rate also allows founders to communicate more effectively with investors. It provides a factual basis for explaining runway, funding needs, and strategic priorities. Understanding how to calculate burn rate ensures these discussions are backed by accurate numbers.

Gross burn rate vs net burn rate

There are two main burn rate types you should track. Gross burn rate is your total monthly operating costs before income. Net burn rate is your total monthly expenses after subtracting revenue.

Focusing only on gross burn can hide the amount of cash your revenue covers. Net burn gives a clearer view of how fast cash actually leaves your accounts. Both measures give a full view of financial health moving forward.

How to calculate gross burn rate

To calculate gross burn rate, total all your cash outflows over the month. These may include:

• Salaries and wages
  
• Rent or workspace costs
  
• Software and tools
  
• Marketing and advertising
  

Gross burn rate is simply the sum of those operating costs each month.

How to calculate net burn rate

Net burn rate reflects the actual amount of cash lost after accounting for incoming revenue.

The formula is simple:

• Add up all monthly cash expenses
  
• Subtract your monthly revenue
  

For example, if you spend AUD $80,000 and bring in AUD $20,000, your net burn is AUD $60,000. This is the actual pace at which your working capital is decreasing. Calculating net burn monthly helps detect issues early and adjust budgets, ensuring you know how to calculate burn rate.

How to calculate cash runway

Cash runway indicates the number of months your business can sustain operations at its current spending level. You can determine this by dividing your available cash by your monthly net burn.

For instance, let’s say you have AUD $300,000 in your reserves, and your net burn is AUD $50,000 per month. In that case, you have six months of runway. Knowing this allows you to schedule key milestones like product launches or fundraising talks well before cash runs short.

Tracking the runway also helps prepare contingency plans if revenue dips unexpectedly. Monitoring cash runway frequently allows you to adjust growth strategies or spending proactively.

What is a good burn rate?

There’s no universal benchmark for a good burn rate. What matters is how long your runway is relative to your goals and circumstances. Many founders aim for at least 12 to 18 months of runway as a general target buffer.

Some high‑growth companies accept higher burn if they can show revenue growth that justifies it. Understanding how to calculate burn rate alongside other financial metrics helps determine whether spending is sustainable. 

Consider metrics such as monthly revenue growth and net profit for a complete financial picture. A good burn rate supports growth without jeopardising the business’s survival.

Common causes of a high burn rate

Common reasons your cash burn rate may be high include:

• Expanding headcount faster than revenue growth
  
• High fixed costs like leases or expensive tools
  
• Heavy marketing spend with slow return
  
• Low sales performance that fails to offset costs
  
• Unexpected operational expenses, such as repairs or emergencies
  
• Overinvestment in new product development without immediate revenue
  

These causes signal where you might adjust spending or boost revenue to improve your financial position. Tracking them consistently can prevent future cash shortfalls and allow for better forecasting.

How to reduce your burn rate

When your burn rate feels risky, consider trimming expenses or increasing income. Examples include:

• Renegotiating supplier contracts
  
• Pausing hiring of non‑essential roles
  
• Cutting underused subscription tools
  
• Focusing on sales channels with higher returns
  

These steps can extend your runway without undermining growth potential. Combining expense reduction with revenue improvement is often the fastest path to lowering net burn. Periodic review of both fixed and variable costs ensures spending aligns with strategic goals.

Burn rate vs cash flow: What is the difference?

Burn rate measures how quickly your cash reserves shrink, usually when expenses exceed revenue. Cash flow tracks all inflows and outflows, including profitable periods.

Burn rate focuses on cash leaving your business before you become cash‑flow positive. Knowing these figures supports smarter choices around expenses, hiring plans, and investments while reinforcing burn rate calculations.

FAQs

What is the difference between gross and net burn rate?

Gross burn rate measures your total cash outflows. Net burn rate subtracts revenue to show the amount of cash you actually lose each month.

How often should I calculate burn rate?

You should calculate burn rate monthly, so you catch trends early before they impact your runway. This helps you adjust spending quickly.

What expenses count toward burn rate?

Operating costs count toward burn rate, including salaries, rent, software, and marketing. Include any regular cash outflow your business must pay.

How do I calculate my runway?

To calculate your runway, you need to know how to calculate burn rate. Divide your current cash by your net monthly burn. This shows how many months your business can operate before funds run out.