Cash burn rate: definition and purpose

The cash burn rate shows how quickly a company uses its capital and how long its financial reserves will last. Expressed in months (monthly burn or monthly burn rate), it represents the company’s cash runway.

In particular, the burn rate measures negative operating cash flow: the gap between expenses and revenue. This is crucial for startups, which often rely on external funding until they become profitable.

More than just a snapshot, the cash burn rate reveals a company's financial sustainability. It indicates whether and for how long a company can survive without additional capital.

Cash burn rate tells how long a company can survive

When a company has a high cash burn rate and struggles to generate revenue or secure additional funding, liquidity issues can arise quickly.

Unlike profit and loss statements, the cash burn rate tracks real cash outflow. It's particularly crucial for:

• Startups in their growth phase
• Companies with negative cash flow
• Companies in transition
• Investors and financiers

Types of burn rate

Gross burn rate

• Includes all monthly expenses
• Reflects total capital consumption
• Essential for managing costs

Net burn rate

• Takes revenue into account
• Reveals actual net capital consumption
• Used to calculate runway

Calculating cash burn rate

Gross burn rate, net burn rate, and runway: these three metrics are crucial for understanding your company’s cash flow. Here’s a quick breakdown of the key formulas:

Cash burn rate formula

Monthly Net Burn Rate = Starting capital – Ending capital

Runway formula

Runway (in months) = Available capital / Monthly net burn rate

Example calculation: cash burn rate

A startup has €1 million in capital, with monthly expenses of €100,000 and revenue of €40,000.

• Gross burn rate: €100,000 per month
• Net burn rate: €60,000 per month
• Runway: €1 million / €60,000 = 16.7 months

This means that, under current conditions, the startup can continue operating for 16.7 months before running out of cash, assuming no change in revenue or expenses. 

However, whether this cash burn rate is sustainable depends on various factors, including the company's growth prospects, funding options, and potential cost-cutting measures. If revenue grows, or if the company secures additional funding, the runway could extend. Conversely, if expenses increase or revenue declines, the runway could shorten.

Cash burn rate across different company stages

The significance of a company’s cash burn rate changes depending on its stage of growth. In the early phase, a high burn rate is often unavoidable due to heavy investments in business development. As a company matures, however, controlling burn rate becomes essential for financial stability.

Early stage: building momentum

At this stage, companies typically lack positive cash flow and rely on external funding. While a high burn rate is expected, securing additional financing is crucial to sustain operations until revenue is generated.

Growth stage: scaling smartly

In the growth phase, revenue increases, but companies continue heavy investments in expansion. Monitoring the burn rate becomes necessary to ensure the company has enough runway to reach profitability.

Later stage: from cash burn to profitability

In the later stage, minimizing burn rate and optimizing cash flow take precedence. Companies must shift focus from spending to profitability, with the goal of becoming self-financing.

Why cash burn rate matters

Cash burn rate isn’t just a measure of spending – it shows how long a company can survive with its current funds.

Why investors watch cash burn rate

Investors keep a close eye on a startup’s burn rate, it’s a direct measure of how fast the company is spending its cash and how long it can keep going before needing more funding. A high burn rate with limited reserves means a short runway and potential liquidity risks. It’s also a test of financial discipline – investors want to see that capital is fueling growth, not just disappearing.

If a startup burns through cash too quickly, it may be forced to raise money under less-than-ideal conditions. The sweet spot? Spending that drives growth while keeping profitability within reach.

Why founders watch cash burn rate

Founders track burn rate because it’s their financial lifeline. It tells them how long they can operate before needing more cash – whether from revenue, investors, or loans. A high burn rate without enough runway means tough choices: cut costs, raise funds, or risk running out of money.

It’s also a key signal of efficiency. Smart founders balance spending and growth, making sure every dollar moves the company forward. Burn too fast, and they lose control. Burn too slow, and they might miss opportunities. The goal? A burn rate that fuels growth without burning out the business.

A high burn rate demands quick action: securing funding, cutting costs, or boosting revenue. A lower burn rate means more runway and a better shot at profitability.

Cash burn rate and liquidity planning

A company’s cash burn rate determines how long its reserves will last. Without a clear view of this number, financial planning is guesswork. Businesses that track their burn rate can anticipate when they’ll need fresh capital and avoid liquidity shortages.

Risk vs. growth

Running out of cash, not a lack of revenue, kills most startups. Poor liquidity planning, not bad ideas, drives companies into insolvency. 

But being too cautious can also stifle growth. Unused capital weakens efficiency. Striking the right balance is key.

How to align cash burn and liquidity planning

Your goal is to align your cash burn rate with liquidity planning. What measures can help?

• Cash flow forecasting: map out revenue and expenses to spot risks early.
• Cost efficiency: cut fixed costs and keep variable costs flexible.
• Flexible financing: you can cover short-term funding gaps with providers like re:cap.
• Working capital management: adjust supplier and customer payment terms to keep cash moving.
• Scenario planning: run “what-if” analyses to prepare for market shifts.

Example: cash burn and liquidity planning

A SaaS startup has fixed monthly costs of €500,000 and grows 15% per quarter. Its monthly recurring revenue (MRR) is €400,000, with a 5% churn rate.

At this pace, the company has five months of runway before running out of cash.

What are its options?

By optimizing liquidity planning, it manages cash flows more effectively, negotiates longer payment terms with suppliers, and secures additional working capital through flexible financing options.

The result:

• Lower cash burn
• Extended liquidity to one year
• Stable growth

Cash burn analysis: how to analyze your cash burn rate

Understanding your cash burn rate shows not just how fast your company is spending money but also what’s driving it.

Key factors affecting cash burn rate

• Company stage: early-stage businesses often burn more cash due to investments in infrastructure, product development, and growth.
• Cost structure: high fixed costs or personnel expenses drive up burn rates.
• Revenue: companies without stable income tend to burn cash faster.
• Investments: expanding into new markets or launching new products can temporarily increase spending.

A high cash burn rate isn’t inherently bad. There can be several reasons why a company is burning more money, and whether it's positive or negative depends on the context and goals. 

When high cash burn is justified

• Investments in growth and scaling: expanding into new markets or acquiring customers aggressively can be positive if the return justifies the cost.
• Planned capital deployment: a high burn rate is fine if it's part of a well-funded strategy for market dominance.

When high cash burn rate signals trouble

• Inefficient cost structures: high rent, bloated payrolls, or wasteful spending erode margins.
• Unprofitable business models: if revenue can't catch up with expenses, long-term viability is at risk.
• Expensive customer acquisition: high CAC without strong retention means burning cash with no lasting return.
• Bad financing decisions: debt with high interest rates can drain liquidity.
• External cost pressures: inflation and rising input costs can squeeze margins if not managed well.

Conclusion: A high cash burn rate isn’t automatically a bad sign – poor liquidity planning is. The key is whether it’s due to strategic investments or inefficient cost structures. Nevertheless, according to the OpenView Benchmarking Report 2023, around 32% of SaaS startup founders are concerned about a high cash burn rate. What can you do about it?

What to do if cash burn rate is too high

A company should take action if the cash burn rate becomes too high, in order to use financial resources more efficiently. Here are some strategies:

• Cut costs: eliminate waste without stalling growth.
• Boost revenue: increase pricing, expand sales efforts, or find new revenue streams.
• Optimize financing: seek better funding terms or alternative capital sources.
• Improve cash flow: speed up receivables, reduce inventory, and tighten payment terms.

Cash burn rate: monitoring, controlling, and optimization

A high cash burn rate drains liquidity and shortens runway – a risk no company can ignore. Systematic cash flow monitoring and liquidity management help keep finances under control.

Monitoring and controlling cash burn 

A structured burn rate monitoring system helps companies identify financial bottlenecks early and act accordingly. Important metrics include:

• KPIs and Metrics
• Monthly burn rate trend: how does the burn rate change over time?
• Runway: how long will the existing capital last at the current rate?
• Gross vs. Net Burn: how significant are revenues?
• Unit economics: how efficient are revenues and costs at the transaction level?

Early warning system for financial stability

An early warning system helps minimize financial risks by identifying critical thresholds and monitoring operational indicators.

Thresholds to watch

• Runway below six months: Requires immediate action
• Net burn >20% of available capital: Signals liquidity risk
• Declining unit economics: Indicates shrinking profitability

Operational indicators

1. Customer Acquisition Cost (CAC): Is acquisition sustainable?
2. Customer Lifetime Value (CLV): Does lifetime value outweigh costs?
3. Churn rate: How many customers leave—and why?
4. Conversion rates: Are sales and marketing efforts effective?

Managing and reporting burn rate

Regular reporting and strategic reviews ensure financial stability.

Monthly reporting

• Actual vs. planned burn rate
• Runway forecast
• Major cost drivers
• Efficiency metrics

Quarterly review

• Adjust growth strategy
• Reassess investment priorities
• Evaluate funding needs

Targeted monitoring and controlling of the burn rate not only secures liquidity but also enables informed strategic decisions for sustainable growth.

Managing cash burn rate with liquidity management software

Knowing how much capital you’re spending, and how your cash flow is moving, is fundamental to your company’s financial health. But tracking transactions across multiple bank accounts, revenues, and expenses can quickly become overwhelming. Excel alone won’t cut it when it comes to monitoring your cash burn rate.

Liquidity management software like re:cap gives you better control over your cash flow. It shows how long your runway will last, how it's evolving, and helps you plan liquidity in line with your burn rate.

Conclusion: cash burn rate is a key metric for startups

For startups and growth companies, cash burn rate is a vital metric. It determines how long you can operate with available funds. Early on, profitability takes a back seat. What matters most is keeping the cash flowing. Even Spotify ran at a loss until mid-2023.

Regularly analyzing and managing burn rate prevents cash shortages and keeps your company on track. Effective cash management ensures liquidity – and with it, your company’s ability to grow.