The Burn Rate Formula

Gross burn = total cash out in the period

Net burn   = total cash out − cash collected

Both are cash measures, taken from the bank statement or the cash-flow statement, not from the P&L. Accrual accounting books revenue when it is earned and expenses when they are incurred; burn is about when money actually moves.

• Gross burn answers “how much does it cost to keep the lights on for a month?” It is the number that matters when you are planning headcount and fixed commitments.
• Net burn answers “how fast is the bank account draining?” It is the number that goes into the runway formula: runway = cash ÷ net monthly burn.
• Negative net burn means you collected more than you spent — the company was cash-flow positive in that period, and runway is not a meaningful constraint. See startup runway for reporting that honestly instead of printing a negative month count.

One company, three months. Every figure is cash that actually moved in the month.

In month 3 two enterprise customers paid a year up front. Gross burn went up and net burn went negative in the same month, while the cost base was essentially unchanged — which is exactly why a single month of net burn should never be used on its own.

The rule is “cash moved”, with four judgement calls that change the answer a lot:

• Financing is not negative burn. A round that lands in the account is not revenue collected. Subtract it and net burn looks excellent in the month you raised and worse than reality in every month after.
• Annual prepayments are cash in. They belong in the month they arrive, because that is when the cash is there. The cost is that net burn is lumpy for any business that bills annually — smooth it over three months, or report both the smoothed and the actual figure.
• One-off cash items count in the month they are paid. A legal settlement, a data migration, an office move. Include them, because they are cash, but show them as a separate line when they distort the trend.
• Non-cash items do not count at all. Depreciation, amortisation, share-based compensation paid in stock, invoices accrued but unpaid. None of these empty a bank account.

The most common error is mixing the two bases: payroll taken from the P&L (accrual, includes the last fortnight not yet paid) alongside collections from the bank statement (cash). The result is a number that is neither.

Not on its own. A $2M monthly burn is reckless for a company with $4M in the bank and unremarkable for one with $60M — the ratio that matters is the runway the burn produces. Roughly 18–24 months after a financing round is comfortable, 12 months is the usual floor, and below 12 without a signed term sheet or a credible plan is a problem.

What is worth watching by stage is net burn against net new ARR. Spending $2 to add $1 of ARR is a different business from spending $1 to add $2, at any burn level. If burn grows faster than net new ARR for three consecutive quarters, the constraint is efficiency, not the size of the cheque.

It says nothing about the pipeline. Burn is a lagging cash number. A company that has just signed three enterprise contracts and not yet collected looks identical, this month, to one that is failing.

It hides commitments. A signed office lease, an annual tool contract renewed but not yet invoiced, approved headcount not yet started — all of these obligate future cash that this month’s burn does not show. Add committed-but-not-started costs when the question is “how long can we last”, and leave them out when the question is “what did we spend”.

It is not a measure of health. Cutting the team that delivers the product improves burn and can destroy the business. Burn constrains time; it does not describe quality.

It rewards prepayment. Because annual prepayments land as cash, a business that pushes annual billing can show negative net burn for a quarter with unchanged economics — and a spike the following year when renewals fall due later than expected.