Burn Rate and Net Burn

Defining the metric

Gross burn = total operating cash outflow per month (payroll, rent, software, contractors, marketing, every cash expense). Net burn = gross burn minus operating cash receipts. A business spending \$200K/month and collecting \$140K/month has gross burn of \$200K and net burn of \$60K.

For mature, profitable businesses, net burn is negative — they generate cash, not consume it. For startups and turnarounds, net burn is positive and the central metric. Calculate it from the cash flow statement, not the P&L (which includes non-cash items).

Smoothing for lumpy cash

Revenue lumpiness can make a single month's net burn misleading. Use a 3-month trailing average for a stable view. If you just collected a large invoice, that month's burn looks artificially low; don't extrapolate.

For decision-making, separate 'recurring burn' (predictable monthly costs) from 'discretionary burn' (this month's marketing experiment). When extending runway in a crisis, you can't cut recurring burn quickly but you can immediately stop discretionary.

Smoothing one-time items

Reported monthly burn is noisy. A single annual prepayment, a one-time consulting fee, or an unusual expense category can swing reported burn by 20-50% in either direction. The useful number is trailing-three-month average net burn with annual or one-time items normalized — that's the rate at which the business is actually consuming cash on a steady-state basis.

Distinguish operating burn from total cash change. Operating burn is the cash effect of running the business; total cash change includes investing (capex, acquisitions) and financing (debt draws, equity raises). For runway purposes, what matters is operating burn — financing inflows extend runway but don't reduce burn, and treating them as offsets produces a runway number that's wishful thinking.

Track burn as a percentage of gross profit, not just in dollars. A $500k monthly burn against $5M of monthly gross profit is healthy; the same burn against $1M of monthly gross profit is a five-month runway. The denominator gives the burn number context that the absolute dollar amount lacks.

Investors look at burn multiple — net new ARR ÷ net burn — to judge SaaS efficiency. A burn multiple under 1 is excellent (you're generating more new ARR than you're burning); 1-2 is healthy; over 3 is concerning. The metric strips out scale and growth-rate accidents and focuses on the unit efficiency of the dollars you're consuming.