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Beginner

What is burn rate

Also known as: cash burn, net burn, gross burn, monthly burn, burn

Definition

Burn rate is how much cash a business loses each month. Net burn subtracts what came in, gross burn counts only what went out. Cash ÷ net burn gives runway.

Why it matters

Burn rate is the speed, runway is the distance: cash divided by net burn gives the months left.

Common mistakes

Counting a loan or an investment that arrived in the month as income, so the burn looks smaller or even like a gain.

Related terms

Worked exampleIllustration

One month's burn, read from the bank statement

Bank statement, one month

  • Balance on the 1st₪180,000
  • Salaries-₪25,000
  • Operations (rent, suppliers, software)-₪12,000
  • Marketing-₪8,000
  • Payments from customers+₪15,000
  • Balance on the 30th₪150,000

The burn this month

  • Gross burn: everything that went out₪45,000
  • Net burn: what went out minus what came in₪30,000

Steps

  1. The balance fell from ₪180,000 on the 1st to ₪150,000 on the 30th, and no loan or investment came in, so the drop is the net burn.₪30,000

  2. Everything that went out, salaries 25,000, operations 12,000 and marketing 8,000, is the gross burn.₪45,000

  3. Customers paid ₪15,000, so net burn is 45,000 minus 15,000.₪30,000

  4. Runway at this pace: 150,000 ÷ 30,000.5 months

Take one off inflows out first. If a ₪50,000 loan had arrived that month, the balance would have risen by ₪20,000 and the burn would look like a gain.

Illustration

The idea in one picture

Cash in ₪15,000, Gross burn ₪45,000, Net burn: ₪30,000 a monthCash reservesCash in₪15,000Gross burn₪45,000Net burn: ₪30,000 a month
Gross burn is everything that went out, ₪45,000. Customers paid ₪15,000, so the net burn is ₪30,000 a month, and the ₪150,000 left lasts about 5 months at this pace.

What this burn does to the bank

A net burn of ₪30,000 a month empties ₪150,000 in 5 months. Cut spending or raise income, and watch the month move.₪150,000⁨5 months⁩0123456⁨Months from today⁩
  • At today's income

A net burn of ₪30,000 a month empties ₪150,000 in 5 months. Cut spending or raise income, and watch the month move.

The balance at the end of this month, falling by the net burn every month after it. Gold marks the month it reaches zero.

Definition

Burn rate is the pace at which a business uses its cash, measured per month. Gross burn is all the cash that goes out in the month: salaries, rent, suppliers, marketing, equipment bought and loan repayments. Net burn is gross burn minus the cash that came in from customers, the amount the bank balance actually falls. Burn counts cash, not accounting expenses, so depreciation, which takes no cash, stays out, while equipment paid this month counts in full. Money raised from investors, a new loan or an owner's deposit is not income and is never subtracted, otherwise the burn looks smaller than it is. The bank statement shows net burn directly: the opening balance minus the closing balance, after taking out any such one off inflow.

Why it matters

Burn is not bad in itself. A business may spend more than it earns on purpose, to build a product or stock up before a season, as long as it knows how long it can keep it up and what the spending buys. Paul Graham's test of default alive helps here: at this burn and the recent pace of income growth, does the business reach profit before the cash runs out? Burn becomes a warning when it grows month after month without the income growing with it.

Directly related: Runway, Cash flow, Overhead.

Formula

Monthly Net Burn = Total Monthly Cash Outflows - Total Monthly Cash Inflows

Improvement tips

  • Track both numbers every month: gross burn shows what the business spends, net burn what it loses.
  • Read net burn from the bank statement, opening balance minus closing balance, after removing any loan, investment or owner's deposit that came in.
  • Spread the payments that do not come every month, such as VAT, income tax advances, annual insurance and the accountant's annual fee, into a monthly figure.
  • Before cutting, sort the outflows into those that bring income in the next few months and those that are nice to have.

Common mistakes

  • Leaving out payments that do not come every month, such as VAT and income tax advances, annual insurance or the accountant's annual fee.
  • Counting only operating expenses and forgetting equipment purchases and loan repayments, which take cash too.
  • Treating burn as a fixed number instead of reading it again every month from the bank.

Related terms

FinanceBeginner

Runway

Runway is the number of months a business can keep going on the cash it has today, at its current pace of spending and income: cash divided by monthly net burn.

FinanceBeginner

Cash flow

Cash flow is the money coming into and going out of a business's account in a period. A profitable business can still run short of cash when customers pay late.

FinanceBeginner

Overhead

Overhead is the indirect cost of running a business, like rent, bookkeeping, insurance and admin salaries, that cannot be traced to one product or customer.

From the blog

How Much Does It Cost to Open a Business in Israel?

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Early-Stage Fundraising: What Investors Need to See

How founders can prepare for early fundraising with clearer milestones, traction evidence, dilution thinking, and investor-ready answers.

Quick check

What is the difference between gross burn and net burn?

Choose an answer

Frequently asked questions

Do I need to estimate burn rate before starting a business?
Yes. Listing what will go out each month, and what will come in during the first months, shows how much money you need to start with and how long it lasts.
When does burn rate first become relevant for a new business?
From the first payment for setup: equipment, software, registration. Until customers pay, gross burn and net burn are the same number.
How do I plan the burn of a business that has no income yet?
List every expected monthly payment and split it into what the launch needs and what can wait. The launch list is your starting burn. Dividing your starting money by it tells you how many months you have to reach the first sales.
Is a high burn rate always a bad sign?
No. Spending more than you earn can be a plan, for example building a product or buying stock before a season. It is a problem when nobody can say what the spending buys, or when it grows while income does not.
Why does burn rate matter for a business that is already running?
It shows how fast the cash is going and whether that pace is changing. A burn that creeps up month after month is an early warning, well before the balance itself looks alarming.
What goes wrong when a business ignores its burn rate?
Commitments pile up, a hire here, a subscription there, until the cash runs out sooner than anyone expected. Decisions that could have been made calmly get made in a hurry.
How do I calculate burn rate without stopping daily work?
Once a month, subtract the closing balance from the opening balance on the bank statement. Before you do, take out anything that is not income, such as a loan, an investment or a deposit of your own. What remains is the net burn.
How can I reduce burn rate without hurting sales?
Cancel subscriptions nobody uses, renegotiate with current suppliers, and use freelancers for work that is not needed every month. Keep the spending that brings customers in.
What does burn rate mean in plain words?
How much money the business loses each month: what goes out minus what comes in.
Is burn rate complicated to understand?
No. It is one subtraction, done from the bank statement. The only trap is counting borrowed or invested money as if customers had paid it.
Do I need an accountant to calculate burn rate?
Not for the number itself, the bank statement is enough. The accountant can tell you which tax payments are coming and when, such as VAT and income tax advances, so they are part of the monthly figure. Educational material, not tax or legal advice.
How is burn rate connected to runway?
Runway is the cash divided by the net burn. A business with ₪150,000 in the bank and a net burn of ₪30,000 has five months, and every ₪5,000 it cuts from the monthly burn buys it more time.

Sources: Paul Graham, "Default Alive or Default Dead?", October 2015 (paulgraham.com)

Last reviewed: 2026-09-23

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