Burn Rate Basics: How to Calculate and Lower Your Startup’s Burn

Launching your business means investing time, energy, and money into growing your dream—but how fast is your business burning through cash? If you don’t know your burn rate, you’re flying blind, and running out of cash could be closer than you think.

Your burn rate is one of the most critical metrics for startups and small businesses. It tells you how much money you’re spending each month—and how long you can keep going before your runway (read: cash reserves) runs out.

Here’s everything you need to know about calculating and lowering your burn rate so you can keep your business afloat and thriving.

What Is Burn Rate—and Why Does It Matter?

Burn rate is the amount of money your business spends each month to cover expenses. It’s a key indicator of your financial health and determines how long you can operate before running out of cash—or needing additional funding.There are two types of burn rate to know:

• Gross Burn Rate: The total amount of money your business spends in a month (e.g., rent, salaries, tools, and other expenses).

• Net Burn Rate: The amount of money your business loses each month after subtracting revenue from expenses.

For example:

• If your business spends $20,000 per month and earns $15,000 in revenue, your gross burn rate is $20,000, and your net burn rate is $5,000.

Why It Matters:

• It helps you calculate your runway, or how many months you can survive with your current cash reserves.

• It identifies whether your spending is sustainable—or if you’re heading for trouble.

• Investors often look at burn rate to assess your financial management and funding needs.

Step 1: How to Calculate Your Burn Rate

Calculating your burn rate is simple, but it starts with knowing your numbers. Here’s the basic formula:

Gross Burn Rate Formula:

Total Monthly Expenses = Gross Burn Rate

Net Burn Rate Formula:

(Monthly Revenue – Monthly Expenses) = Net Burn Rate

Calculate Your Runway:

Once you know your burn rate, calculate your runway:

Cash Reserves ÷ Net Burn Rate = Runway (in months)

For example:

• If you have $50,000 in cash reserves and a net burn rate of $5,000, your runway is 10 months.

Pro Tip: Update your burn rate and runway calculations monthly to track your financial progress and spot red flags early.

Step 2: How to Lower Your Burn Rate

If your burn rate is too high, don’t panic—there are plenty of ways to cut costs without sacrificing the long-term health of your business.

Here are five strategies to reduce your burn rate:

1. Trim Non-Essential Expenses

Start by reviewing your budget and identifying areas where you can cut back. Look for subscriptions, services, or tools that aren’t critical to your operations.

Examples:

• Downgrade software plans you’re not fully utilizing.

• Cancel unnecessary memberships or unused services.

• Delay non-essential purchases like office upgrades.

Pro Tip: Go through your expenses line by line—you might be surprised by how much you can save.

2. Negotiate with Vendors and Suppliers

If you’ve been working with the same vendors or suppliers for a while, reach out to renegotiate terms. Many are open to offering discounts or flexible payment options to loyal customers.

Examples:

• Ask for bulk discounts or lower rates on recurring services.

• Negotiate longer payment terms to improve cash flow.

3. Optimize Your Team

Labor is often one of the largest expenses for startups, so it’s important to evaluate your team’s structure. That doesn’t always mean layoffs—look for ways to maximize efficiency.

Examples:

• Consider hiring contractors or freelancers instead of full-time employees.

• Automate repetitive tasks to free up your team’s time.

Pro Tip: Focus on retaining top talent while scaling back in areas that aren’t mission-critical.

4. Focus on Revenue-Generating Activities

While cutting costs is important, increasing revenue is just as effective at reducing your net burn rate. Shift your focus to activities that directly drive sales or attract new customers.

Examples:

• Double down on marketing strategies with a proven ROI.

• Launch low-cost, high-margin products or services.

• Upsell or cross-sell to your existing customer base.

5. Monitor Cash Flow Like a Hawk

Keeping a close eye on your cash flow is one of the best ways to control your burn rate. Regularly review your financial reports to stay on top of inflows and outflows.

Examples:

• Set up alerts for large or unusual transactions.

• Forecast your cash flow monthly to identify potential shortfalls early.

Step 3: Know When to Raise Funds

Sometimes, cutting costs isn’t enough to sustain your business—or fuel your growth. If your runway is shrinking and your burn rate is still high, it might be time to raise additional funding.

When to Consider Fundraising:

• Your runway is less than 6 months, and you’re not yet breaking even.

• You need additional capital to scale or invest in growth opportunities.

Pro Tip: Start conversations with investors early—raising money takes time, and you don’t want to wait until you’re out of options.

Final Thoughts: Manage Your Burn, Extend Your Runway

Burn rate isn’t just a number—it’s a reflection of your business’s financial health and sustainability.

By calculating and managing your burn rate, you’ll gain greater control over your cash flow and make smarter decisions about spending, growth, and fundraising.The key is to stay proactive: regularly monitor your expenses, trim the fat where needed, and focus on generating consistent revenue. With a healthy burn rate and a solid runway, you’ll keep your business moving toward profitability—and beyond.