Burn Rate

Burn rate is the diagnostic for businesses operating at a deficit, whether by choice (investing for growth) or by accident (margin compression). Computed as monthly cash inflows minus monthly cash outflows; a positive burn means cash is leaving.

Two flavors: gross burn (all monthly cash outflows, ignoring revenue) and net burn (outflows minus collections). Net burn is what determines runway.

Even cash-flow-positive SMBs benefit from tracking burn during seasonal troughs (Q1 for retail, summer for B2B) to spot trouble before it compounds.

Runway is the derived metric: cash balance ÷ monthly net burn. A business with $500k in the bank and $50k/month net burn has 10 months of runway before it must raise capital, cut expenses, or increase revenue. Runway shortening faster than time passing is the alarm signal — a $500k → $400k drop in one month at $50k/month planned burn means a $50k gap that needs explaining, not celebrating that runway still shows 8 months on the model.

The right burn calculation excludes financing (equity raises, debt draws) but includes debt service and lumpy operating items (quarterly tax, annual insurance). For most small businesses, burn is best computed as a rolling 3-month average of net operating cash flow — the single-month number bounces too much on timing to be useful. Weekly variance against a 13-week forecast catches problems earlier than monthly retrospective.

For growth-stage or investor-backed businesses, the ratio to watch is 'burn multiple' — net cash burned in a period divided by net new ARR (or revenue growth) produced in that period. A burn multiple under 1× means the business is generating more than a dollar of new revenue for every dollar of cash burn — healthy growth. Above 2-3× typically signals inefficient growth spending that investors will discount at the next raise.