What Is Burn Rate Forecasting?
Key Takeaways
- Burn rate is the net amount of cash a business spends each month.
- Runway is the number of months of cash remaining at the current burn rate.
- Gross burn measures total cash out; net burn subtracts revenue received.
- Managing burn rate proactively is essential for businesses not yet at break-even.
What burn rate means
Burn rate is the rate at which a business consumes its cash reserves, typically expressed as a monthly figure. Gross burn rate is the total cash spent each month before any revenue is received — essentially, your total monthly outgoings. Net burn rate is the gross burn minus cash received from customers, representing the net decrease in your cash balance each month. Net burn is the more useful figure for assessing financial sustainability: it tells you how quickly you are depleting your reserves after accounting for the revenue you are generating.
Calculating runway
Runway is the number of months your business can continue operating at its current burn rate before running out of cash. It is calculated by dividing your current cash balance by your monthly net burn rate. If you have £300,000 in the bank and your net burn is £30,000 per month, you have 10 months of runway. Runway is the most critical metric for any business operating at a pre-profitability stage. It determines the urgency of fundraising, the timing of key hires, and the pace at which you can invest in growth without risking insolvency.
Forecasting burn rate over time
A static burn rate calculation tells you where you stand today. A burn rate forecast tells you where you will be in 3, 6, and 12 months — which is far more useful. To build one, project your monthly cash outflows (including any planned headcount additions, marketing spend increases, or CapEx) alongside your projected cash inflows from revenue. The net of these two produces your projected monthly burn, and the running cash balance tells you when you will hit zero. If the model shows you running out of cash in eight months, you have enough time to act — raise capital, cut costs, or accelerate revenue.
Managing burn rate deliberately
Burn rate is not just a reporting metric — it is an operational lever. Reducing burn extends runway without requiring new capital. The most effective ways to reduce burn are reducing payroll (through hiring freezes or restructuring), renegotiating supplier contracts, cutting discretionary spending, and improving collection of receivables to bring revenue cash in faster. Any burn reduction decision should be evaluated against its impact on revenue-generating capacity: cutting the wrong costs can shrink revenue faster than it cuts burn, making the financial position worse.