The Founder's Guide to Cash Burn Rate: How to Calculate It and Why It Matters

You are in the meeting. It is going well. The product demo was flawless, you have articulated the market need, and the investors seem engaged. Then, the inevitable question arrives: "What's your current monthly burn rate and runway?"

You feel a knot tighten in your stomach. You know your bank balance. You know roughly what went out last month. You give an answer based on a quick mental calculation. The answer is vague, and you know it. The investors know it, too.

This scenario is all too common. For many startup founders, especially in the SaaS world, the focus is justifiably on product development, user acquisition, and building a team. Financials can feel like a distraction, a necessary evil for the next funding round.

But this perspective is dangerous. Your cash burn rate is not just a number for a pitch deck. It is the single most critical metric for your company's survival. It is the speedometer, the fuel gauge, and the GPS for your startup's journey. Ignoring it is like trying to build a rocket while refusing to look at the fuel tanks.

Here in the Denver startup community, we see brilliant founders focused on building incredible technology. But that technology is fueled by cash. Understanding how fast you are consuming that fuel is the first and most important job of a CEO.

This guide will walk you through exactly what burn rate is, how to calculate it properly (and not just on the back of a napkin), and how to use it to make strategic decisions that will keep your company alive.

What Exactly is Cash Burn Rate?

In the simplest terms, cash burn rate is the speed at which your company is spending its cash. For early-stage startups that are not yet profitable, it measures the net loss of cash each month.

Investors ask about it because it is the primary input for determining your runway, which is how long you can operate before you run out of money.

Where many founders go wrong is by looking at only one number. There are two types of burn rate, and the difference is critical.

1. Gross Burn Rate: This is the total amount of cash your company spends in a given period, usually a month. It includes all your cash operating expenses: salaries, rent, software subscriptions, marketing costs, professional services, and so on.
2. Net Burn Rate: This is the number that truly matters. It is your Gross Burn Rate minus any cash you generate from revenue during that same period.

Net Burn Rate = Cash Spent (OpEx) - Cash Received (Revenue)

For a pre-revenue startup, the gross and net burn rates are the same. But for a SaaS company with paying customers, the net burn rate is the true measure of your cash deficit. This is the number an investor is asking for. It tells them how much money you are losing each month while you build and scale.

How to Calculate Your Burn Rate (The Right Way)

The founder in our opening example likely used a common but flawed method. They looked at their bank balance on October 1st ($600,000) and their balance on November 1st ($550,000) and said, "My burn rate is $50,000."

This is a historical average, and it is dangerously misleading.

Why? It fails to account for one-time expenses, like an annual insurance payment. It ignores the timing of payroll, which might hit twice in one month but only once in another. It does not factor in new hires who are starting next month or a big marketing campaign you just approved.

Your burn rate is not static. It changes. A historical number is a snapshot of the past. An investor, and more importantly you, need a forward-looking number.

Here is the proper, step-by-step method to calculate your burn rate. This process is not a one-time calculation. It is the foundation of a cash flow forecast.

Step 1: Sum Your Monthly Cash Operating Expenses (OpEx)

First, build a clear picture of every dollar going out each month. This is your Gross Burn Rate. You must use cash expenses, not accrual-based expenses.

This means you count the expense when the cash leaves your bank account.

Your list of cash expenses will likely include:

• Payroll: Salaries, benefits, payroll taxes, and contractor payments.
• Rent & Utilities: Office space, internet, and electricity.
• Software & Subscriptions: Your entire SaaS stack (e.g., AWS, Slack, Salesforce, HubSpot).
• Marketing & Sales: Ad spend, conference costs, and commissions.
• General & Administrative (G&A): Legal fees, accounting services, and office supplies.
• Research & Development (R&D): Any specific costs related to product development that are not already covered in payroll or software.

Do not include non-cash items like depreciation or amortization. They are accounting entries, but they do not affect your bank balance.

Let us say your total monthly cash OpEx is $80,000. This is your Gross Burn Rate.

Step 2: Sum Your Monthly Cash Inflows

Next, look at all the cash coming in.

For a SaaS company, this is not your Monthly Recurring Revenue (MRR) or your Annual Recurring Revenue (ARR). Those are revenue recognition metrics. You need to know the actual cash collected from customers.

If a customer pays $12,000 for an annual plan, that is a $12,000 cash inflow this month, even though your MRR for that customer is only $1,000. Conversely, if you bill a customer $5,000 but they have not paid yet (Accounts Receivable), you cannot count it.

Let us say you are consistently collecting $30,000 in cash from customers each month.

Step 3: Calculate Your Net Burn Rate

Now, you just do the simple math.

Gross Burn Rate ($80,000) - Cash Inflows ($30,000) = Net Burn Rate ($50,000)

This $50,000 is your answer. It is the defensible, accurate number to give an investor. It is the number you must use to manage your business. It means that, on average, your company's cash position will decrease by $50,000 every month.

Now, Calculate Your Runway

The burn rate is only half of the equation. Its true value comes when you use it to calculate your runway.

Runway is the number of months your company can survive before you run out of money, assuming your burn rate and inflows remain constant.

The formula is simple:

Runway (in months) = Total Current Cash Balance / Net Burn Rate

Let's use our example. You have calculated your Net Burn Rate is $50,000 per month. You look at your bank account and you have $750,000 in cash.

$750,000 / $50,000 = 15 months

You have a 15-month runway.

This number is your new north star. It informs every strategic decision you make.

• Fundraising: Investors want to see at least 12-18 months of runway after they invest. If your runway is 15 months, you should not wait 12 months to start fundraising. The process takes 3-6 months. You should probably start your next fundraise in 6-8 months.
• Hiring: You want to hire two new engineers at $15,000 per month (total cost). You know this will increase your gross burn by $30,000. Your new net burn will be $80,000. Your runway would instantly drop from 15 months to just over 9 months ($750,000 / $80,000). Can you achieve the milestones needed for the next round in 9 months?
• Survival: If you have 6 months of runway, you are in the danger zone. You do not have time to prove a new market. You must either cut costs or raise money, now.

From Calculation to Control

Knowing your burn rate and runway transforms you from a passenger to a driver. That feeling of terror when an investor asks the question is replaced by a feeling of confidence.

The calculation itself is not the end goal. The goal is to build a rolling cash flow forecast. This is a spreadsheet (or accounting software report) that projects your burn rate and runway for the next 12-18 months.

It is a living document.

• What happens if... we sign that big customer? (Cash inflows go up, burn rate goes down).
• What happens if... we hire that new marketing manager? (Burn rate goes up, runway goes down).
• What happens if... we lose our biggest customer? (Burn rate goes up, runway goes down).

This forecast is your single source of truth. It allows you to model scenarios and make decisions based on data, not on a "gut feeling" about your bank balance.

A vague answer in a pitch meeting does more than make you look unprepared. It signals to an investor that you are not in full control of your company's financial health. It signals risk.

Conversely, a clear answer builds immediate trust. Responding with, "Our net burn for the last quarter averaged $50,000. We've just hired a new sales lead, so we're forecasting that to increase to $65,000 for the next two quarters as we ramp them. Based on our current $750,000 in cash, that leaves us with 11.5 months of runway, which gets us well past our Series A milestones," is the response of a founder who is in complete command.

Managing your cash flow is not a chore to be outsourced and forgotten. It is the most fundamental mechanism for keeping your vision alive. Focus on your product, yes. But build your company on a foundation of accurate, forward-looking financials. Your future self, and your investors, will thank you.