Definition — What is Burn Rate? 

Burn Rate is a key term that every entrepreneur should be familiar with. To be brief, “Burn Rate” is the amount of money a company has to spend each cycle (burn) to stay alive before generating sufficient cash flow. In other words, burn rate tells you how quickly your business “burns through” capital. All businesses—regardless of their stage in the business life cycle—can benefit from knowing their burn rates.

Burn Rate = Cash balance in prior month – Cash balance in the current month.

Simply put, the burn rate is the net cash you are spending every month.

Gross Burn Rate:

Gross burn shows how much your business spends on operating expenses alone. Operating expenses include things like payroll, rent, and taxes. This metric relies on the assumption that your business is not generating a positive cash flow. If the business above, for example, is spending $5,000 per month on salaries, rent, and utilities, the gross burn rate would be $5,000 per month.

Net burn rate takes revenue into account (if your business has generated any), but it still only looks at a single month. To calculate, simply subtract your revenue from all spending and expenses over a month. This will leave you with how much money was lost that month. Investors may ask specifically for these metrics when deciding whether to invest in your business or not. However, most business owners trying to understand the state of their finances will opt to calculate their overall burn rate instead.