Calculating Your Burn Rate

Gross burn is every dollar that leaves the company in a month: salaries, rent, software subscriptions, ad spend, legal fees, and any other expense. Net burn subtracts any revenue collected in that same month. Pre-revenue startups have identical gross and net burn figures; once you generate revenue, the gap widens.

Investors ask for both because gross burn reflects operational efficiency—how much your company spends to run—while net burn shows actual cash consumption. High gross burn with low net burn signals a strong revenue engine; both high means structural cost problems. A healthy SaaS company might have gross burn of $150k but net burn of only $40k because revenue covers $110k of expenses.

Runway is simple: current cash on hand ÷ monthly net burn. If you have $600k in the bank and burn $50k per month, your runway is 12 months. The 18-month rule states that you should begin fundraising when runway drops to 6 months—not 1 month. New rounds take 3–6 months to close, and you must not run out of cash during the process.

Use a 3-month rolling average instead of a single month's burn because one-time expenses distort the picture: annual software renewals, bulk marketing spends, or hiring bonuses spike a single month. Calculate January–March average, then look at trend: is it rising or falling month-over-month? This trend tells you if your cost-cutting is working.

Conservative scenario: zero growth, costs stay flat. This answers 'worst case, how long do we survive?' Base scenario includes budgeted growth and planned hires. Aggressive scenario includes pipeline best-case: all deals close, all expansion upsells hit, hiring happens faster. Model all three and calculate runway for each.

Present all three to investors with the spread clearly shown. 'Our conservative runway is 14 months, base is 18, aggressive is 24 months' demonstrates that you've thought through risk, not just assumed everything works perfectly. Investors respect discipline more than optimism. If conservative and base are close, you're being realistic; if they're far apart, investors distrust your assumptions.

First audit: SaaS subscriptions. Most early-stage startups waste $10k–$20k monthly on unused tools—Figma seats nobody uses, Notion workspaces created and abandoned, Slack channels that went dormant, AWS resources from a project that shipped six months ago. Pull a usage report from each tool; if active users are below 50% of licenses, cut immediately. Baremetrics Cancellation Insights shows which subscriptions have highest churn risk.

Second audit: hiring timeline. Don't hire a senior engineer if runway is under 12 months; instead, hire a contractor for 90 days to test the role and prove need. Contractors cost 60–70% of salary (no benefits, no equity vesting), and you learn quickly if the role is essential. Third audit: salary review. Remote engineers are cheaper than co-located ones; junior mid-levels cost 40% less than seniors for many roles. Every $10k in monthly savings is one extra month of runway.