Burn Rate
runway · net burn · cash burn
The rate at which a business consumes cash, usually stated monthly. It is the number that determines how long you have, and it is measured in cash rather than profit because payroll clears in cash.
In practice
$120,000 in the bank, $20,000 leaving each month after revenue. Six months of runway, and that date does not move because a plan says it should.
The common mistake
Measuring burn from the profit and loss statement. Accrual accounting records revenue you have not been paid, and the bank balance is what determines whether you can make payroll.
Burn rate is the speed at which a business consumes cash. Gross burn is total monthly outgoings; net burn is outgoings minus money coming in.
Runway
Cash in the bank divided by net burn gives runway — the number of months before the account reaches zero at the current rate. $120,000 in the bank and $20,000 of net burn is six months of runway.
Runway is the only number that sets a deadline you cannot negotiate. Revenue targets slip and plans get revised; the date the money runs out does not move unless you move it.
Cash and profit are different questions
A profitable business can run out of money, and this surprises people every year. Profit is recorded when you invoice. Cash arrives when the customer pays. If you pay contractors in thirty days and get paid in sixty, growth increases the gap, and the faster you grow the worse it gets. See cash conversion cycle.
The same applies to acquisition. Spending $2,000 to win a customer who repays over ten months is a good decision and a cash outflow now. Ten of those in a month is $20,000 gone against $2,000 of monthly margin arriving.
Reading your own number
Calculate net burn on actual bank movement rather than the profit and loss statement. Then separate what is committed from what is discretionary. Salaries and rent continue whether or not you decide anything; contractors, advertising and tools can be stopped this week. The ratio between the two tells you how quickly you could extend runway under pressure, which is a more useful thing to know before you need it.
Below roughly six months of runway, decisions change shape. Long-payback acquisition stops being available and options narrow, which is why the number is worth watching well before it becomes urgent. See pipeline not runway.
Concept web
Open the full webQuestions
What is burn rate?
The rate at which a business consumes cash. Gross burn is total monthly outgoings; net burn subtracts incoming revenue and determines how long the remaining cash lasts.
How do you calculate runway?
Divide cash in the bank by net monthly burn. $120,000 in the bank against $20,000 of net burn gives six months before the account reaches zero at the current rate.
Can a profitable business run out of cash?
Yes. Profit is recorded when you invoice and cash arrives when you are paid. If you pay suppliers faster than customers pay you, growth widens the gap and consumes cash.