Burn rate: how fast the money is leaving, and how long it lasts

Burn rate is how much cash a business consumes in a month. Gross burn is everything going out; net burn is the difference between what goes out and what comes in — the amount by which the bank balance actually falls. Net burn is the one that matters, because it is what shortens the time you have.

The term arrives from funded startups and applies to any business spending more than it collects, which at some point includes most of them. A seasonal shop over a slow quarter, a consultancy between contracts, and a company that has just hired ahead of revenue are all burning cash, and all benefit from knowing at what rate.

The arithmetic

1. Take the bank balance at the start of the month and at the end. The fall between them is net burn for that month. This is deliberately cruder than a management account, and cruder is the point.
2. Average the last three months, because a single month contains a quarterly tax payment or an annual renewal and will mislead in either direction.
3. Divide the current cash balance by average net monthly burn. That is runway, in months.
4. Adjust for what you already know is coming: a tax bill, a renewal, a hire, a large invoice due. A runway figure that ignores a known payment is not a forecast, it is a comfort.
5. Recalculate monthly. Runway is the number that changes fastest and the one people check least often.

Runway under six months changes what decisions are available, and that threshold is worth knowing before you cross it. Raising finance, negotiating terms and hiring all take longer than people expect; at three months of runway most of those doors are already closing. The point of tracking burn is not the number itself but reaching the decision while the options are still open.

Gross and net, and why both

Gross burn is total monthly outgoings and tells you the size of the machine you are running. Net burn is outgoings minus receipts and tells you how fast the balance falls. A business with high gross burn and near-zero net burn is large and self-sustaining; the same gross burn with revenue disappearing is an emergency. Watching only net burn hides how exposed you are to a single customer, because their payment is the only thing keeping the net number small.

Reducing it, in order of speed

• Collect what you are owed. Usually the fastest cash improvement available and the least painful, covered in credit control.
• Delay discretionary spending — tools, travel, projects that can wait a quarter.
• Renegotiate payment terms with suppliers before you need to, which is a normal conversation in advance and an awkward one afterwards.
• Reduce or defer commitments: subscriptions nobody uses, space larger than you need, contracts renewing on autopilot.
• Staff costs last, because they are the slowest to change and the most damaging to reverse — and the least reversible if you cut too deep.

Where it lives

Ettex Books holds the transactions that make burn visible, and the forward view — what is due to arrive and leave over the coming quarter — belongs in cash flow forecast, which is the same discipline over a longer horizon. The underlying question of whether the price covers the costs at all is break even analysis.

The limits: no bank feed, no automatic balance import, no runway alerting. The monthly calculation is manual, and for a number this consequential that is a smaller problem than it sounds — the person who does it is the person who knows.