Burn rate measures monthly cash consumption. Gross burn is total cash spend; net burn is gross burn less cash collected; average net burn over a period is starting cash minus ending cash divided by the number of months. Runway is cash on hand divided by net burn.
Gross burn and net burn
Gross burn is the total cash going out the door in a month: payroll, contractors, rent, hosting, tooling, marketing, the lot. It answers the question of what it costs to run the company as it currently exists, and it ignores revenue entirely.
Net burn is gross burn less the cash actually collected in that month. Cash collected, not revenue recognised: an invoice raised in March that gets paid in June does nothing for your March burn. Net burn is the number that drives runway, and it is the one an investor means when they ask what you are burning.
A business with cash receipts exceeding cash costs has a negative net burn, which is another way of saying it is cash generative. Most venture-backed companies are not there yet, and that is the expected condition rather than a failure. Most SaaS businesses at the scale-up stage are burning cash.[1]
How to calculate burn rate
The direct calculation over a period is the simplest and least arguable, because it uses two bank balances rather than a classification exercise:
Average monthly net burn = (starting cash - ending cash) / number of months
Built up from the cash flows rather than from the balances:
Gross burn = total cash operating outflows for the month
Net burn = gross burn - cash collected from customers
Take a three-month average rather than a single month. One month carries quarterly BAS, an annual insurance renewal or a large customer settling three invoices at once, and any of those will make a single month look like a trend it is not. Exclude financing events from the calculation too. Money from a raise is not revenue, and leaving it in makes burn disappear on paper in the month it lands.
Burn rate and runway
Runway is the point of the exercise:
Runway (months) = cash on hand / average monthly net burn
A flat runway number assumes burn stays where it is, which it does not if you are hiring. The version worth having is a forward one, built off the hiring plan and the collections you actually expect, so the number moves when a decision moves it. For directors this is not only a management concern: the duty to avoid trading while insolvent sits with the officeholders, and ASIC's guidance on the obligations of company officeholders sets out what that means in practice.
| What the number answers | Where founders get caught | |
|---|---|---|
| Gross burn | What it costs to run the company as it stands, before any revenue is counted. | Quoting gross burn when an investor asked for net makes the business look worse than it is, and quoting net when they asked for gross hides your true cost base. |
| Net burn | The actual monthly drain on the bank account after cash collected from customers. | Built from invoiced revenue instead of cash received. If your customers pay in 60 days, revenue-based net burn is flattering you by two months. |
| Runway | How many months the current cash balance lasts at the current rate of net burn. | Calculated flat, off today's burn, while a hiring plan sits underneath it that will raise burn every month for the next two quarters. |
Who owns burn in a growing Australian company
For a while, the founder does. That works, and then it stops working quite suddenly. Founder-led finance does not scale at all; it eventually runs its course as the business grows, and the symptoms are a scrambled financial model and cash conversations that are more of a guess than a position.[2] The moment a board is asking for runway to a specific week rather than a rough quarter, the guess is no longer good enough.
For startups up to circa 20 staff, the finance priorities are cash runway, burn rate, fundraising readiness and systems.[3]That is a first finance hire brief, not a CFO brief, and it is worth being precise about the difference. A first finance hire typically lands when a company is at 10 to 20 people or a couple of million ARR; a first CFO is more like 50 to 70 heads or $5 to $10 million ARR, though it can be less for lean tech businesses.[4] Burn is the metric that most often tells you which side of that line you are on.
Below that, a fractional arrangement is the honest answer. Fractional CFOs are a classic startup requirement, because the business does not need someone full time but does have problems to sort out before a raise, or needs help through the raise itself, with the focus squarely on visibility and runway.[5] If your burn is being reconstructed from a bank feed the week before a board meeting, that is the tier you are in, whatever the org chart says.
If a full-time hire is not justified yet, the comparison worth making is what a fractional CFO does and what it costs.
What your burn rate says about the hire you need next
Burn is not just a number to report; it is a constraint on who you can hire and what you should ask of them. Founders and CFOs scaling fast, usually with external funding and with burn rate front of mind every month, need finance hires who can do the work and build the process at the same time, while staying lean.[6] That combination is the actual brief. A pure process builder who cannot do the work is too expensive at your stage, and a pure doer who never builds the process leaves you in the same position twelve months later.
When that hire lands properly, the change shows up in the cash conversation first. Reporting gets clearer, forecasts become more believable, board preparation gets less chaotic, cash conversations get more accurate, and hiring plans get properly tested before they turn into commitments.[7] That last one is the compounding benefit, because in a company burning cash, every headcount decision is a runway decision.
Burn on its own says nothing about whether the spend is working. That is what the startup efficiency ratios are for.
Common questions
What is a burn rate?
Burn rate is the rate at which a business consumes cash, normally quoted per month. Gross burn is total cash going out. Net burn is gross burn less the cash collected from customers in the same period, and it is the figure that determines runway. Negative net burn means the business is cash generative.
How do you calculate burn rate?
The simplest method uses two bank balances: starting cash minus ending cash, divided by the number of months in the period, which gives average monthly net burn. Building it up instead, gross burn is total cash operating outflows for the month and net burn is gross burn less cash collected. Use a three-month average and strip out financing events, or a single quarterly payment will distort the picture.
How is runway calculated from burn rate?
Runway in months is cash on hand divided by average monthly net burn. A flat calculation assumes burn stays where it is, which is rarely true in a company that is hiring. The version worth reporting is forward-looking, driven off the hiring plan and expected collections, so the number responds when a decision changes it.
Who should own burn rate reporting in a startup?
Initially the founder, and that holds until the board starts asking for runway to a specific date. At roughly 10 to 20 people or a couple of million in ARR the work belongs with a first finance hire, whose priorities at that stage are cash runway, burn rate, fundraising readiness and systems. Below that threshold a fractional CFO is often the right answer, particularly ahead of a raise.
References
- What I see at that stage: most SaaS businesses at the scale-up stage are burning cash.
- Where I land on this: it does not scale at all, and eventually runs its course as a business grows, leading to a scrambled financial model and cash conversations that are more of a guess.
- How this plays out by stage: for startups up to circa 20 staff, the priorities are cash runway, burn rate, fundraising readiness and systems.
- My read on the Australian market: for a first finance hire the target company typically has 10 to 20 people or a couple of million ARR; for a first CFO it might be 50 to 70 heads or $5 to $10 million ARR, though it can be less for lean tech businesses.
- How I think about it: they are a classic startup requirement, because businesses do not need someone full time but have issues to sort out before a raise, or need help with the raise process itself, focusing on visibility and runway.
- From a role brief I wrote: for founders and CFOs who are scaling fast, often with external funding and with burn rate front of mind every month, the need is for finance hires that can do the work and build the process, all while staying lean.
- The way I put it to founders: reporting gets clearer, forecasts become more believable, board prep gets less chaotic, cash conversations get more accurate, and hiring plans get properly tested before they become commitments.