What is startup burn rate and what are the top mistakes startups should avoid?

Burn rate refers to the pace at which a company spends its cash reserves. It represents negative cash flow per month, typically expressed in dollars. If a startup spends $50,000 more than it earns in a month, its burn rate for that period is $50,000.

The metric tracks cash outflow over time, not profitability or revenue growth. A profitable startup reinvesting cash into expansion can still carry a burn rate.

A high burn rate does not automatically signal trouble. When spending drives product development or customer acquisition, it can fuel growth. However, burn rate reveals how quickly a company will deplete its cash absent new funding or revenue. Consider it a financial fuel gauge. Founders need to know consumption rates to plan accordingly.

Not all burn rates are calculated the same way. Founders should understand the two main types of burn rate and when to use each one.

Gross burn rate

Gross burn rate is the total cash a company spends per month before accounting for any income. This figure is essentially all the operating expenses. Salaries, rent, marketing, infrastructure, software subscriptions. Everything that requires cash going out the door.

If all your expenses sum up to $120,000 in a month, that's your gross burn. Simple as that.

Gross burn gives you a picture of your total monthly cost base and where the money goes, regardless of revenue. It's useful for understanding the absolute spending required to keep the lights on and the team paid. However, it doesn't tell you whether any of those costs are offset by incoming cash. It's purely a "money out" figure.

Net burn rate

Net burn rate measures how much cash a company actually loses each month after accounting for revenues or other cash inflows. In other words, net burn equals monthly cash outflows minus monthly cash inflows.

This is the more telling number for most startups because it shows the true cash loss per month. If that same startup spends $120,000 in a month but brings in $40,000 in revenue, its net burn is $80,000 for the month

Net burn rate is often considered the critical metric. It directly correlates with runway, which tells you how many months of cash you have left. Investors and founders focus on net burn because it shows how quickly the company's bank balance is actually shrinking. When someone asks about your burn rate, they usually mean net burn.

Keeping a close eye on burn rate is a matter of survival. According to CB Insights, nearly 3 in 10 startups fail because they run out of money, making cash burn one of the top reasons for startup failure. That statistic alone should make burn rate a priority metric for every founder.

Tracking burn rate tells you how long before the company's cash runs dry if current spending and revenue trends continue. This remaining time is known as runway. If a startup has $1 million in the bank and a net burn rate of $100,000 per month, it has roughly 10 months of runway left before needing more funds or reaching profitability.

Founders and investors use burn rate to gauge whether the business is sustainable and when to raise the next round of funding. If burn rate is too high, the startup might be forced into premature startup fundraising or painful cost cuts to avoid running out of cash. Conversely, if the burn rate is very low, it could mean the startup is not investing enough in growth and innovation.

Monitoring burn rate also imposes financial discipline. It serves as an early warning system. If expenses start climbing or revenue dips, the burn rate will worsen, and corrective action may be needed. One study showed 55% of startup founders had less than six months of cash runway on hand. That's a precarious position that deters investors and can lead to desperate measures.

By tracking burn rate monthly, founders can avoid surprises and make strategic adjustments well before a crisis hits. Slowing hiring, trimming unnecessary spend, or accelerating sales efforts are all easier decisions when you see the numbers trending in the wrong direction early.

Calculating burn rate is straightforward. In general, burn rate equals cash spent in a period of time divided by the length of that period. Most often it's expressed on a monthly basis. There are two formulas, mirroring the types of burn.

Gross burn rate

Gross burn rate = Total cash outflows over period ÷ number of months

Gross burn rate equals total cash outflows per month. Add up all cash expenses for the month or period. If total outflows in January were $200,000, that's the gross burn for January. You can also average this over multiple months for a smoother number.

Net burn rate

Net burn rate = Cash outflows per month − cash inflows per month

Net burn rate equals cash outflows minus cash inflows per month. If in January the company spent $200,000 and brought in $50,000 in revenue, net burn equals $150,000 for that month.

Another way to express net burn is starting cash minus ending cash, divided by number of months. This assumes no new funding came in during that period. For example, if a startup began the quarter with $500,000 and ended with $200,000 three months later, it burned $300,000 over three months. Divide that by 3 to get a $100,000 per month burn rate.

While the formula is simple, actually calculating burn rate requires gathering the right financial data. Here's a step by step approach any founder or finance team can use.

1. Choose a time frame

Decide if you're calculating monthly burn or a longer period average. Monthly is most common, but you might use a quarter or year for averaging. The key is consistency. Most startups look at burn rate on a monthly basis for real time awareness of their cash position.

2. Gather cash flow data

Pull the numbers for total cash outflows and inflows in that period. This usually means using your cash flow statement or bank account data. Include operating expenses, payroll, rent, and marketing spend on the outflow side. Include product sales, subscription revenue, and interest income on the inflow side. Important note here. You're looking at actual cash movement, so exclude things like non cash expenses such as depreciation or accounts receivable that haven't been collected yet.

3. Calculate net burn or gross burn

Subtract total inflows from total outflows for the period to get net cash burned. If you're doing gross burn, just use the outflows sum. For example, if in April the startup spent $120,000 and received $30,000 from customers, net burn equals $90,000 for April.

4. Verify against cash reserves

Here's a useful sanity check. Look at the cash balance change. If the company had $1,000,000 at the start of April and $910,000 at the end, that's a $90,000 decrease. This should match your calculated burn rate for the month, assuming no new funding or one time cash events. If the numbers don't match, you may have missed something.

5. Express as monthly rate

Ensure you express the final burn rate as a monthly figure. If you used a multi month window, divide accordingly. If $300,000 was burned over 6 months, that's $50,000 per month on average.

Many startups track burn rate in real time through their bookkeeping software or financial dashboard. A simple spreadsheet works fine for early stage companies, but as you scale, having automated tracking becomes increasingly valuable.

Consider a SaaS company with $2.3 million in January that ends June with $1.9 million, having raised no additional funding during those six months.

The cash balance declined $400,000 over six months. Dividing by six yields approximately $66,700 per month. That is the average burn rate.

To verify, consider this scenario. If monthly revenue was $50,000 and monthly expenses approximately $117,000, the net loss of roughly $67,000 aligns with the calculation.

The company can now estimate their runway. Dividing $1.9 million by $66,700 monthly burn equals approximately 28 months. Under consistent conditions, that provides nearly two and a half years before cash depletion. This is generally considered a healthy runway, sufficient to reach milestones or secure additional funding without desperation.

For founders who want to quickly experiment with numbers, a burn rate calculator can be a handy tool. Many startup financial planning tools, or even simple templates in Excel or Google Sheets, function as burn rate calculators. At their core, these calculators take inputs like current cash balance, monthly expenses, and monthly revenue to compute two things. Monthly burn rate and runway.

Here's how a burn rate calculator works. You input your cash on hand and either your net burn or your gross burn and revenue. The calculator outputs your net burn per month and then divides your cash balance by that burn to tell you how many months you have before cash runs out. If you input $500,000 cash and $50,000 net burn per month, it will output a 10 month runway. That's simply $500K divided by $50K.

Some calculators allow you to adjust assumptions, like projected changes in expenses or revenue, to see how your future burn rate and runway might change. This is useful for scenario planning. You can ask questions like "What if we hire 5 more engineers, increasing payroll by $50K per month? How does that affect our burn and runway?" The calculator would show the higher burn and shorter runway, helping you make informed decisions before committing to the expense.

Calculating burn rate doesn't require a special tool. It's simple math as we've covered. But many startups use financial dashboards or apps that automatically calculate burn rate in real time from their bookkeeping data. This can be part of a startup's financial hygiene. Always knowing your burn rate at a glance removes guesswork and keeps the entire team aligned on cash position.

No universal standard exists. Acceptable burn depends on a company's stage, industry, and strategy.

Early-stage startups typically sustain higher burn rates while investing aggressively in product development, hiring, and growth before revenue materializes. Later-stage companies approaching profitability face expectations for more controlled spending.

A common guideline focuses on runway duration. Historically, advisors suggested maintaining 12 to 18 months of cash reserves. More recently, many recommend 18 to 24 months as a buffer. This implies burn rates should remain low enough to avoid cash exhaustion within a year. A runway of six months or less typically raises concerns unless new funding is imminent. Venture capitalists often consider three months of remaining cash a danger zone.

Market conditions also matter. During periods when capital flows freely, investors may tolerate higher burn in pursuit of rapid growth. When funding tightens, acceptable burn drops as startups must extend their runway. In 2021, many venture-backed companies prioritized market share with elevated spending. By 2023, as funding contracted, those same companies faced pressure to reduce burn and ensure 24-plus months of runway.

The key is context. Compare burn rate to industry norms. Ensure adequate runway. Many startups begin fundraising with six to nine months of cash remaining, not when approaching empty, to allow time for the funding process.

Burn rate is driven by expenses. The cash a startup spends. It's useful to break down the major categories that contribute to your burn so you know which levers you can pull when adjustments are needed.

Headcount and payroll

For most startups, salaries and associated benefits are the single biggest expense. Every hire adds to the burn rate through salary, payroll taxes, healthcare, and other benefits. A growing team can rapidly increase monthly burn. Hiring five engineers might add hundreds of thousands in annual costs. When reducing burn quickly, headcount is usually the first consideration because it represents the largest line item.

Go to market spend

This includes all sales and marketing expenses needed to acquire customers. Advertising campaigns, marketing tools, sales team commissions, PR efforts, events, and sponsorships all fall into this bucket. Go to market spend drives growth but can burn cash quickly, especially in industries where paid customer acquisition is expensive. If a startup is investing heavily in Facebook or Google ads, these costs will significantly affect burn rate. Founders need to watch the return on this spend to ensure marketing dollars are working hard. In downturns, marketing is often trimmed to reduce burn unless it's absolutely yielding strong returns.

COGS and infrastructure

Cost of Goods Sold applies more to product focused startups like manufacturing or hardware companies. These are costs directly tied to delivering the product or service, including materials, production, and fulfillment. Infrastructure costs matter a lot for software startups. Think cloud hosting fees, servers, data storage, and third party software tools. These are the technical foundations that can scale up as your user base grows. If your app usage doubles, your AWS bill might double too. Monitoring these costs helps avoid surprises. A sudden surge in users is great for growth but could cause a spike in cloud costs if not optimized.

Overhead and general administrative

Overhead refers to all the other operating expenses that keep the company running but aren't directly tied to production. This includes office rent, utilities, insurance, office supplies, travel, and professional services like legal and accounting. While each line item might seem small on its own, together overhead can form a significant portion of monthly burn. Startups in costly cities with big offices will have higher overhead. A downtown office lease and associated utilities can run tens of thousands per month. During the pandemic, many startups learned they could cut overhead by going remote or downsizing office space, which directly reduced burn.

Managing burn rate means taking control of your spending so that you don't run out of cash before hitting your goals. Founders should be proactive about burn. Don't wait until cash is almost gone to make changes. Here are strategies for keeping burn rate under control.

Regularly review and cut unnecessary expenses

Conducting periodic audits of expenses can uncover costs that aren't truly needed. This could be unused software subscriptions, overpriced vendor contracts, or projects that don't justify their cost. Startups should ask whether cutting a particular expense would actually harm growth or operations. If the answer is no, it's a candidate for trimming. During tighter times, some startups discovered they were paying for multiple similar SaaS tools. Consolidating to one saved money without impacting productivity. Small cuts add up and can meaningfully reduce monthly burn.

Optimize major cost drivers

Payroll and marketing are often the largest expense categories. To manage burn, consider instituting a hiring freeze or delaying hires that aren't critical. Many successful startups have paused hiring when cash was tight, focusing instead on getting more out of the current team. Similarly, reevaluate marketing spend. Shift to lower cost channels like content marketing or organic social media if possible. Ensure that every marketing dollar is working hard. If a particular campaign isn't yielding results, cutting it can immediately lower burn without much downside.

Reduce fixed overhead

Fixed costs like office space and leases can drag on burn month after month. Startups can get creative here. Move to a co-working space or smaller office to cut rent. Go fully remote if feasible. This strategy was used widely in 2020 when the pandemic forced companies to rethink their cost structures.

Airbnb provides a powerful example. When travel demand collapsed in early 2020, the company suspended $800 million of marketing spend and froze hiring to reduce its burn rate during the crisis. Top executives also took pay cuts. This drastic action extended their runway to survive a severe downturn in revenue. Many other startups likewise cut fixed costs during that period, from office perks to travel budgets, all to preserve cash.

Increase revenue or find quick wins

While cutting startup costs is one side of the equation, managing burn can also include boosting cash inflow. That could mean pushing to close sales faster, offering promotions to get customers to pay sooner, or selling unused assets. Any extra revenue will offset the burn. Some startups temporarily take on consulting projects or short term contracts to bring in cash and buy more runway. However, be careful that chasing small revenues doesn't distract from the core business.

Plan fundraising carefully

Managing burn also means aligning your spending with your fundraising strategy. If you know you need to raise a new round by Q4 next year, your burn rate should be set such that you still have 6 to 9 months of cash left by that time. This avoids going to investors almost empty handed. If fundraising might be tough, deliberately reducing burn to extend the runway makes sense. Right after a successful fundraise, some increase in burn is expected to accelerate growth. But it should be intentional and measured.

Have a contingency plan

Even with best efforts, things can change. Market downturns, loss of a big customer, a delayed funding round. Savvy founders manage burn by preparing backup budget cuts in advance. Identify what could be trimmed or scaled back if funding gets delayed. Having this plan lets you act quickly to curb burn rate when needed rather than scrambling in crisis mode.

One of the challenges in managing burn rate is catching overspending in real time, before it shows up in monthly reports. This is where modern spend control tools play a big role. By implementing spend controls, startups can prevent budget overruns and identify wasteful spending as it happens rather than weeks later.

Spend control solutions allow founders and finance teams to set specific limits and policies on company spending. You can assign business card limits to employees, teams, or expense categories. Set a monthly cap for marketing spend or a strict limit on travel expenses per quarter. By capping how much can be spent on a corporate card, you ensure no team exceeds the budgeted amount. This directly controls burn because it's impossible to overspend beyond the limit. The card will simply decline once the cap is reached.

You can also block certain merchant categories or specific vendors entirely. If you know certain types of expenses are not allowed or want to prevent use of vendors that are too costly, you can enforce that automatically. This curbs waste and reinforces spending policy without requiring manual review of every transaction. For larger purchases, you can require pre approval from a manager or the finance team before money goes out the door. This ensures big expenditures are scrutinized and potential budget breakers are caught early.

These spend controls act as guardrails for your burn rate. They enforce the budgets and policies you've planned, and they do so automatically and immediately. That means fewer surprise expenses at month end and better visibility into where cash is going at any moment.

Brex's spend management software and corporate cards are built specifically for startups that want this level of control. The platform offers customizable spend limits, merchant category blocking, real time expense tracking, and approval workflows that scale with your team. Founders can log into the dashboard and instantly see spending patterns across the company, catching potential problems before they become crises.

This combination of smart corporate cards and spend management software means a company can empower employees to spend for business needs while keeping tight control to prevent overspending. As your startup scales and more people are making purchases, automated controls ensure the company stays on track financially without creating bottlenecks.

If you're serious about managing your burn rate and extending your runway, Brex gives you the tools to do it. Sign up for Brex today and take control of your startup's spending before it takes control of you.