Accounting technology / Glossary / Burn rate and cash runway

What are burn rate and cash runway?

Definition

Burn rate is the speed at which a company uses up its cash, usually measured per month. Gross burn is total monthly cash spending; net burn is spending minus cash coming in. Cash runway is how many months its cash will last at the current net burn: cash on hand divided by net burn.

Also calledcash burnrunwaynet burngross burn

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Net burn: Cash out minus cash in
Runway: Cash divided by net burn
Measured: Monthly, often a 3-month average

How burn rate and runway work

A startup with 2 million in the bank, 300,000 of monthly costs and 100,000 of monthly receipts has a gross burn of 300,000, a net burn of 200,000 and ten months of runway. Burn is usually measured from bank cash flows over the last three months to smooth out timing, and should include loan repayments and capital spending, not just operating costs. Runway on a flat burn is a starting point; a better view comes from a cash forecast that includes planned hires, revenue growth and one-off payments. Investors and boards watch runway closely, because raising money typically takes several months: many companies aim to start fundraising with at least a year of runway left. Efficiency measures relate burn to growth, such as the burn multiple, net burn divided by net new annual recurring revenue.

Common questions

What is the difference between gross burn and net burn?+

Gross burn is all the cash a company spends in a month. Net burn subtracts the cash it receives, mostly from customers, so it shows how fast the cash balance is actually falling.

How do you calculate cash runway?+

Divide cash and readily available funds by monthly net burn. A company with 1.2 million in cash and a net burn of 100,000 a month has twelve months of runway.

What is a burn multiple?+

Net burn divided by net new annual recurring revenue over the same period. It shows how much cash a company spends to add each unit of recurring revenue; lower is more efficient.