The burn rate is basically how much money a startup is burning before it hits profitability. It’s the gauge that tells you whether you’ll have enough cash to last 12 months or crash before you get there.
So, what is it exactly?
Burn rate is the amount of money, in dollars, a company churns through each month from its cash reserves. It’s a monthly measure, pretty simple: money going out as a startup until you start making money from your operations.
There are two types of burn rate. Gross Burn Rate is the total cash a company spends each month just to keep the lights on. Net Burn Rate is what you get when you subtract monthly cash inflows from monthly cash outflows.
In a nutshell, Gross Burn Rate will give you the monthly cost of running the business. Net Burn Rate shows what’ll happen to your cash reserves.
Why Burn Rate Matters to Financial Pros, Bookkeepers, and Accountants
Your clients want runway projections, not just P&L statements. Burn rate gives you that. Investors ask for it during due diligence, boards want it every month, and your job is to calculate it right and flag problems before cash hits zero.
Tracking burn consistently allows you to project how many months the company can continue operating before it needs new funding or growth. That means proactive planning instead of scrambling when the money runs out. When net burn spikes, that means trouble: unplanned costs, delayed revenues, or just wasteful spending. If you catch it early, you have time to fix it.
Burn rate also matters for audit preparation.
Clean numbers require tight bookkeeping: proper cash classification, appropriate payroll timing, and monthly reconciliations to catch errors before they compound.
How to Calculate Burn Rate
You’ll use three formulas, in the same order, every month: gross burn, then net burn, then runway.
Gross burn rate: The total amount of operating cash out the door for the month. This includes payroll, rent, utilities, software subscription, bills from vendors, contractors, marketing, insurance, and other regular expenses. It does not include capital expenditures, such as equipment purchases or building projects that show up as assets.
Net burn rate (monthly) = gross burn minus cash inflows for the month. Cash inflows are revenue received, interest earned and one-time receipts that hit the account. Use cash basis here, not accrual. If money didn’t move through the bank, it doesn’t count.
Runway (months) = current cash balance ÷ monthly net burn. It tells you how long the company can keep operating at current burn before cash runs out. Cash balance means checking, savings, and liquid reserves you are able to access quickly. Count only un-restricted funds, not unused credit lines.
How to Interpret the Numbers
Net burn is your main health check. The rule of thumb is that if net burn is negative, you’re bringing in more than you’re spending; if it’s positive, cash is draining and time’s ticking.
Less than six months of runway: That is a red flag. Investors get skittish. Vendors ask for faster payment. Employees get nervous. Alert leadership immediately, and force tight cost cuts or urgent fundraising.
The old target used to be 18–24 months. Now, with funding timelines having stretched, many want 24–36 months. These aren’t hard and fast rules, mind you. Industry dynamics, business model, and milestone complexity matter. Shorter runway = higher risk.
Practical levers to reduce burn rate
You will find several moves to be tracked separately to cut costs, boost efficiency, and improve cashflow. Set up your reporting now.
Start by cutting payroll, which is usually the biggest expense. Delay planned hiring. Freeze discretionary bonuses. Move full-time contractors to project-based contracts. Negotiate terms with vendors to extend payments-say from Net 30 to Net 60-to shift cash outflow without increasing costs. Quarterly audit of software subscriptions for duplicate removal. Freeze travel and office perks until runway improves.
Improve operational efficiency to accelerate cash collection. Bill the customer at the time of shipment, rather than on a monthly basis. Employ reminders and early-pay discounts. Establish a purchase approval for purchases over a designated amount. If applicable, optimize inventory turnover to unlock cash.
Revenue and pricing moves should pull cash forward. Consider moving customers to quarterly or annual invoicing and accelerate collections. Get deposits or progress payments before completing work. Emphasize services with higher margins and faster cash collection.
Financing tools buy time while you fix the root causes: bridge loans give short-term capital between rounds, but then must be repaid with interest. Convertible notes give cash now for equity later, deferring valuation to the next round. Customer prepayment brings future revenue forward without diluting equity. Lastly, factoring lets you sell unpaid invoices at a discount for immediate cash when receivables are slow.
Track each lever separately month over month. Create separate line items so leadership knows which moves really extended runway. Payroll cuts, vendor delays, subscription reductions, and collection improvements should show up as different metrics.
Reporting Cadence and Templates for Finance Team
Monthly, I close the books, reconcile bank accounts, handle payroll, confirm that deferred revenue is booked correctly, and ensure that aged payables are paid. From there, I do weekly cash snapshots to see where I sit with immediate cash.
What I do for the weekly snapshot is pull three numbers: cash on hand, a rolling 3-month average net burn, and how many months I have before running out of cash. The key metric is monthly net burn rate because this dictates hiring, spending, and fundraising decisions.
A few bookkeeping quirks can mess up the burn rate. Reversing payroll accruals from a prior month that didn’t actually go to cash can double-count expenses. Debt should record cash received as deferred revenue, not as recognized revenue under accrual. Payroll timing must be aligned with cash outflow to avoid month-crossing errors. Keep a centralized table by which you classify cash transactions so that your books remain consistent.
Legal and Tax Considerations for US Attorneys
Burn rate for a startup intersects with legal/tax obligations that the lawyers should be aware of. Payroll tax timing does matter-federal and state deposits come at strict schedules that usually do not coincide with monthly cash planning. Whether something is capital versus operating does affect GAAP reporting and, consequently, burn rate metrics, especially under the new ASC 842 lease rules.
Deferred revenue provides a timing gap between when the revenue is accrued and versus cash is available to cover burn calculations. Lawyers should make sure bookkeeping separates cash received from revenue recognized so runway projections stay up to date. Convertible notes/SAFEs bring in cash financing now but create future obligations that affect your valuation later.
Coordination between Legal, tax advisors, and bookkeepers is very important. Lawyers should advise the clients to work with qualified professionals to classify the transactions properly before any audits or filings.
Conclusion
Burn rate and runway are the backbone of startup cash management. If you calculate it right and consistently report, then your clients can make wiser calls regarding survival and growth.
MagicBooks automates burn rate tracking and real-time cash reporting to extend runway and avoid running out of money. Built for founders and finance teams, MagicBooks gives you clean financials to stay funded.
Frequently Asked Questions
What is the exact formula I should use to report monthly net burn to my CFO?
Net burn equals total cash outflows for the month minus total cash inflows for the month. Report net burn as a positive number indicating cash used.
Which ledger accounts must be included when calculating gross burn?
Include payroll cash disbursements, vendor cash payments, rent, utilities, contractor payments, and cash taxes. Exclude capital asset purchases recorded as CAPEX that are financed separately.
Should deferred revenue be counted as an inflow when calculating net burn?
Only count deferred revenue when cash has been received. Do not count revenue recognized on an accrual basis unless the cash hit the bank.
How do I handle payroll timing differences that cross month boundaries?
Use cash basis timing for burn: include payroll in the month the cash actually leaves the company’s bank account.
What is the simplest way to calculate runway if net burn is negative (positive cash flow)?
If net burn is negative, runway is technically indefinite. Instead, report months until next planned financing or reforecast to include growth assumptions.
Which three KPIs should show up in every weekly cash snapshot?
Cash balance, trailing three-month average net burn, and runway in months based on current cash and net burn.
How should abnormal one-time inflows (asset sales, one-off grants) be treated in runway calculations?
Exclude one-time inflows from sustainable run rate. Show a separate adjusted runway that omits these items for planning clarity.
Do convertible notes or SAFEs appear in burn calculations?
Not directly. The cash from a convertible note is a financing inflow and counts toward cash balance, but future dilution or conversion does not change the immediate burn calculation.
What accounting controls reduce the risk of misstated burn rate?
Monthly bank reconciliations, cut-off checks for accrual reversals, and a standardized cash classification table for operating versus financing flows.
Which legal or tax events can unexpectedly increase burn within a month?
Payroll tax deposits, forced vendor catch-ups, litigation settlements, and accelerated lease payments are common triggers. Flag these in the cash snapshot.
