Burn Rate
A critical financial metric that measures how quickly a company is spending its cash reserves, typically expressed as a monthly rate of cash outflow.
What is Burn Rate?
Burn rate is a fundamental financial metric for SaaS companies and startups that measures the rate at which a company consumes its cash reserves to fund operations. It's typically calculated on a monthly basis and serves as a critical indicator of a company's financial health and sustainability.
For SaaS companies, understanding and managing burn rate is essential for maintaining runway, securing funding, and achieving profitability. It directly impacts strategic decisions about growth, hiring, and resource allocation.
Types of Burn Rate
Gross Burn Rate
The total amount of cash a company spends each month, including all operating expenses, salaries, rent, marketing costs, and other expenditures.
Formula: Total Monthly Operating Expenses
Net Burn Rate
The amount of cash a company loses each month after accounting for revenue. This provides a more accurate picture of cash consumption.
Formula: Monthly Expenses - Monthly Revenue
How to Calculate Burn Rate
Monthly Burn Rate Formula
Burn Rate = (Cash at Start of Month - Cash at End of Month)
Example Calculation
• Starting cash: $500,000
• Ending cash: $450,000
• Monthly burn rate: $50,000
Burn Rate and Runway
Burn rate directly determines your company's runway - the amount of time you can operate before running out of cash. This is crucial for planning fundraising and achieving profitability.
Runway Formula
Runway = Cash on Hand ÷ Monthly Burn Rate
Runway Example
Managing Burn Rate for SaaS Companies
Revenue Optimization
- • Focus on customer acquisition
- • Improve conversion rates
- • Increase average revenue per user
- • Reduce churn rate
Cost Management
- • Optimize operational expenses
- • Negotiate better vendor terms
- • Automate manual processes
- • Right-size team and resources
Strategic Planning
- • Set burn rate targets
- • Plan fundraising timeline
- • Monitor key metrics regularly
- • Scenario planning
SaaS Burn Rate Benchmarks
Healthy Burn Rate Indicators
- • 12-18 months of runway minimum
- • Decreasing burn rate over time
- • Clear path to profitability
- • Burn rate aligned with growth targets
Warning Signs
- • Less than 6 months runway
- • Increasing burn without revenue growth
- • No clear monetization strategy
- • Burn rate exceeding industry benchmarks
Related Terms
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