Definition:

Burn rate measures the cash a company spends each month to keep operating before it is able to generate more cash than it spends. The “Net Burn Rate” considers both revenue and expenses.

Example:

You spend $10,000 on the expenses in a month, but only make $6,000 in sales. Your company’s Net Burn Rate would be $4,000 per month.

Why it matters:

Burn rate is used to calculate the runway (months left before the company runs out of money), i.e. cash in the bank divided by monthly net burn rate equals months of runway remaining.

If a company cannot start generating cash, or raise another funding round before it reaches the end of its runway it will go bankrupt. A company burning cash is considered “default dead” since if nothing changes it will fail.