Burn Rate

Burn rate is the speed at which a business consumes its cash reserves. The Securities and Exchange Commission's glossary for small businesses gives the definition in one line: "Burn rate is the rate at which a company spends its cash over time, frequently discussed as a monthly rate." It is most often quoted by early-stage and unprofitable companies, because for those businesses the cash balance rather than the earnings figure is what determines how long they can keep operating.

The phrase has a second, unrelated use worth knowing about, because a reader who has met one will misread the other. In the proxy statements public companies file about their stock plans, "burn rate" means the number of equity awards granted in a year relative to shares outstanding. One such filing puts it plainly: "One means of evaluating the long-term dilution from equity compensation plans is to monitor the number of equity awards granted annually, commonly referred to as 'burn rate.'" That measure is about dilution to shareholders and involves no cash at all. Everything else on this page is the cash sense.

Gross burn and net burn are different numbers, and both are called "burn rate." Gross burn is the total cash leaving the business in a period, with no credit for what came in: payroll, rent, software, materials, interest, everything. Net burn is that figure less the cash the business actually collected in the same period. For a business with meaningful revenue the two can be far apart, and the gap is exactly the point of distinguishing them.

A business with $180,000 a month of cash going out and $140,000 a month coming in has a gross burn of $180,000 and a net burn of $40,000. Both statements are true. Only one of them tells you anything about how long the business survives, and only the other tells you how much of the cost base is fixed enough to have to be paid regardless of sales. Neither is more correct; a report that gives one without labeling it is what causes the error.

The number is read off cash movement, not off the profit and loss statement, and this is where the measure earns its keep. A business using the accrual method reports income when it is earned and expenses when the liability is fixed, which is a rule about timing and not about money in the bank. A business that invoices $200,000 in March and collects it in June reports March revenue and burns March cash. So a profitable business on the accrual method can have a positive net burn in every month of a growth year, and the profit and loss statement will not show it. This is the whole reason founders and lenders track a cash figure separately from the earnings figure.

The corollary matters for anyone reading a business's numbers: burn rate cannot be computed from a profit and loss statement alone. Depreciation is an expense that consumes no cash and inflates the apparent loss; a large inventory purchase consumes cash and does not appear as an expense until the goods are sold; a customer deposit is cash in and revenue later. The reliable way to compute it is from the change in the cash balance, adjusted for anything that moved the balance for a reason other than operations, such as drawing on a credit line or the owner putting money in.

It is not a defined or audited measure. The SEC's glossary entry describes the idea in one sentence and specifies no computation, does not say which cash movements belong in it, and does not distinguish gross burn from net burn. No accounting or auditing standard supplies the missing detail either, which is why two people can quote a burn rate for the same business, disagree by a factor of four, and both be reporting honestly.

There is a useful corroborating passage on the point, and it comes with a caveat that has to travel with it. In 2020 the SEC's Division of Corporation Finance published disclosure guidance for companies reporting through the pandemic, and the question it put to issuers was not whether their burn rate was correct but whether they had defined it: "If you include metrics, such as cash burn rate or daily cash use, in your disclosures, are you providing a clear definition of the metric and explaining how management uses the metric in managing or monitoring liquidity? Are there estimates or assumptions underlying such metrics the disclosure of which is necessary for the metric not to be misleading?" That guidance was withdrawn on May 6, 2025 and imposes nothing today. It is quoted here only for what the staff observed about the metric, which is that a company publishing one has to supply its own definition.

What a reported burn rate usually hides. Three things, each of which makes a single monthly figure less informative than it looks:

• Lumpy payments. Insurance premiums, tax deposits, annual software renewals and equipment purchases do not spread themselves evenly. A business can look calm for two months and then pay three quarterly obligations in one week.
• Seasonality. A landscaping company's January burn and its June burn describe two different businesses.
• One-offs presented as the run rate. A month containing a legal settlement or a deposit on a new lease is not a month that predicts next month, in either direction.

Which is why the useful practice is a trailing average of several months rather than the most recent month, and why a business whose costs are genuinely changing should be looking at a forward projection instead of any historical average at all.

Why anyone outside the business cares. A rising burn rate against a flat cash balance is one of the conditions auditors are told to look for. Public Company Accounting Oversight Board auditing standard AS 2415 lists among the negative trends that may indicate substantial doubt about a company's ability to continue as a going concern: "recurring operating losses, working capital deficiencies, negative cash flows from operating activities, adverse key financial ratios." A persistent net burn is the plain-language version of that third item.

1. Pick the period and be consistent. A month is the convention; a week is useful when the business is close to the edge.
2. Start from the change in the cash balance across the period, using the bank and any operating accounts, not the accounting records.
3. Strip out anything that moved cash for a non-operating reason: a draw on a line of credit, a capital contribution, a loan advance, an owner distribution, the purchase or sale of equipment. What remains is operating cash movement.
4. State gross burn as total operating cash out for the period, and net burn as that figure less operating cash collected.
5. Average across several periods, or project forward if the cost base is genuinely changing. A single month is a data point, not a rate.
6. Label which figure you are quoting every time it leaves the business, because a lender, an investor and a co-owner will each assume a different default.

A hypothetical works the arithmetic and shows the accrual trap in the same numbers. Kestrel Fabrication uses the accrual method. In April it:

• Invoiced $210,000 of work, all completed in April, payable in 60 days
• Collected $146,000 from jobs invoiced in February
• Paid out $189,000 of cash: payroll $104,000, materials consumed on April's jobs $52,000, rent and utilities $19,000, insurance and software $14,000
• Recorded $11,000 of depreciation, which moved no cash
• Drew $40,000 on its line of credit

Gross burn is the $189,000 of operating cash out. Net burn is $189,000 − $146,000 = $43,000 for the month. The $40,000 line draw is excluded because it is financing, not operations, even though it is what kept the balance from falling. The $11,000 of depreciation is excluded because no cash moved.

Now the point of the exercise. April's profit and loss statement reads $210,000 of revenue against $189,000 of cash costs plus $11,000 of depreciation, which is a $10,000 profit. April's net burn is $43,000. The business was profitable and consumed cash in the same month, and the reason is entirely the 60-day gap between finishing work and being paid for it. A business growing quickly under those terms burns cash faster the better it sells.

Pros

• Answers the question that determines survival, which is about money in the account rather than profit on a statement.
• Reaches a fact the accrual method deliberately obscures: the gap between earning revenue and collecting it.
• Simple enough to compute from a bank statement, so it is available to a business with no accountant and no formal reporting.
• Makes lumpy and seasonal cost structures visible once it is tracked over several periods rather than one.
• It is the direct input to the more decision-relevant figure, the number of months of cash the business has left.

Cons

• No standard definition, so two people quoting a burn rate may be quoting different quantities, and neither is wrong.
• Gross and net burn are both called "burn rate," which is the single most common source of confusion about it.
• A one-month figure is easily distorted by a single lumpy payment and is routinely presented as though it were a run rate.
• It says nothing about why cash is leaving, so it identifies a problem without locating it. A high burn from growth investment and a high burn from unprofitable operations look identical in the number.
• It is a backward-looking measure applied to a forward-looking question, and it stops being informative for exactly the business whose costs are about to change.