Why burn rate matters
Burn rate is one of the most important numbers a company with limited capital has. It shows how much money is spent each month to keep the business running, and how long the available capital lasts before the company runs out. Knowing it precisely lets founders spot a squeeze early and act – by cutting costs or raising capital – while there is still room to act.
Key takeaways
- Burn rate shows how much capital is consumed per month.
- It is the quickest read on a company's financial stability.
- The calculation underpins cash planning for founders and investors alike.
- A burn rate calculator gives you a fast estimate of your runway.
- Targeted optimisation lowers the burn rate and extends the company's runway.
What is burn rate?
Burn rate is the speed at which a company consumes its capital. It is normally expressed as a monthly figure and can be read two ways:
- Gross burn rate: total monthly spend, ignoring revenue.
- Net burn rate: the difference between spend and revenue, i.e. how much capital is consumed net each month.
What drives the burn rate
- Fixed costs: recurring monthly spend such as rent, salaries and insurance.
- Variable costs: production, materials and sales costs that move with revenue.
- Revenue: recurring sales that reduce the net burn.
- Capital reserves: the cash available, which determines how long the company survives without further financing.
The formula
Burn rate = monthly fixed costs + variable costs – recurring revenue
Runway
Runway = available capital / net burn rate
Example
A startup has the following monthly costs and revenue:
- Fixed costs: EUR 50,000
- Variable costs: EUR 20,000
- Recurring revenue: EUR 30,000
- Available capital: EUR 500,000
Calculation
Burn rate = 50,000 + 20,000 – 30,000 = EUR 40,000 per month
Runway = 500,000 / 40,000 = 12.5 months
In other words, the company has 12.5 months of runway before the capital is used up.
Use our free burn rate calculator
Want to work out your burn rate quickly? Enter your own figures in the calculator below and get your result straight away.
Burn Rate Calculator
How to improve your burn rate
1. Cut fixed costs:
- Reduce office or warehouse costs.
- Renegotiate rent and service contracts.
- Move to remote work to lower operating costs.
2. Optimise variable costs:
- Make production processes more efficient.
- Negotiate better suppliers and purchasing terms.
- Spend marketing budget deliberately and cut wastage.
3. Increase revenue:
- Refine pricing to raise average revenue per customer.
- Expand sales activity to win new customers.
- Add new revenue streams such as subscriptions or add-on services.
4. Raise capital:
- Open up new investors or financing options.
- Apply for grants or loans to strengthen liquidity.
- Use bootstrapping to reduce capital consumption.
Conclusion: why burn rate is essential
Burn rate is an indispensable metric for startups and any company with limited capital. It shows how fast money is being consumed and how long the business survives without new financing. Analysing it properly and optimising the cost structure deliberately is what keeps a company financially stable over the long run.
Frequently asked questions
1. How often should burn rate be reviewed?
- Monthly, ideally, so adjustments can be made in time.
2. Is a high burn rate always bad?
- Not necessarily, if the company is growing fast and approaching profitability. Over the long run it still has to be controlled.
3. What lowers the burn rate?
- Cutting fixed costs, optimising variable costs and increasing revenue.
4. When does the burn rate become dangerous?
- Once the available capital covers less than six months, it is time to act.
