Burn rate is used by startups and investors to track the amount of monthly cash that a company spends before it starts generating its own income. A company’s burn rate is also used as a measuring stick for its runway, the amount of time the company has before it runs out of money.
If a tech startup spends $5,000 monthly on office space, $10,000 on monthly server costs and $15,000 on salaries and wages for its engineers, its gross burn rate would be $30,000. However, if the company was already producing revenue, its net burn would be different. Even if the company operates at a loss, with revenues of $20,000 a month and costs of goods sold (COGS) of $10,000, it would still work to reduce its overall burn.
In this scenario, the company’s net burn would be $20,000, derived as:
$20,000 — $10,000 — $30,000 = -$20,000