The Cash burn rate describes how quickly a start-up uses up its available cash. It is usually expressed as a monthly figure and shows how much capital a company needs to finance its day-to-day operations whilst outflows exceed inflows.
This key figure is particularly important for young, growth-oriented companies. It helps founders to assess their financial situation and identify their next capital requirements in good time.
What is the difference between gross burn and net burn?
When analysing capital consumption, a distinction is made between two key figures:
- High burn rate: Describes a company’s total monthly outgoings, such as salaries, rent, software and marketing.
- Net burn rate: Shows the actual average monthly cash outflow after taking into account operating cash inflows.
The gross burn therefore illustrates the level of current expenditure. The net burn, on the other hand, shows how quickly the available cash reserves are actually dwindling.
Net capital expenditure is particularly relevant for financial planning, as it forms the basis for the simplified calculation of financial scope.
How is the cash burn rate calculated?
To work out the figure, the monthly deposits and withdrawals are compared.
Net Burn Rate = Monthly outflows − Monthly operating inflows
One example:
A B2B start-up is developing a software solution for industrial processes. The company pays out 40,000 euros a month to cover salaries, infrastructure, marketing and other running costs.
At the same time, it receives 15,000 euros from existing customer contracts.
The calculation is as follows:
€40,000 − €15,000 = €25,000
The start-up therefore spends 25,000 euros more each month than it takes in from its business activities.
It is important to take into account payments that have actually been made. Invoiced turnover and accounting profits do not automatically correspond to available funds.
How is capital consumption related to the runway?
The Runway describes how long a start-up is expected to be able to continue operating with its currently available cash and cash equivalents.
Put simply, it is calculated as follows:
Runway = Available cash and cash equivalents ÷ Monthly net burn
If the start-up from the previous example has 200,000 euros in its business account, the result is:
€200,000 ÷ €25,000 = 8 months
Assuming that deposits and withdrawals remain constant, the calculated financial reach is eight months.
In practice, rising staff costs, delayed customer payments or one-off investments can affect this timeframe.
You can find more detailed information in the innoWerft article on Start-ups’ runway and financial planning.
Why is this key figure important for start-ups?
Particularly in the early stages of a business, many start-ups do not yet generate sufficient recurring revenue to cover all their outgoings.
Regular analysis helps with this:
- To assess the remaining scope for financing
- Identifying liquidity bottlenecks at an early stage
- To review current expenditure and capital expenditure
- Planning the timing of new funding rounds more effectively
- Balancing growth and capital expenditure
- To present financial developments in a way that is clear to investors
High capital expenditure is not necessarily a bad thing. For example, investment in product development or sales can be worthwhile if it helps to achieve key growth targets.
The key question is whether the resources deployed are proportionate to the progress achieved.
How can start-ups optimise their burn rate?
To manage their use of capital, founders should regularly review both their expenditure and the trend in their revenue.
Possible measures include:
- Prioritising costs: Assess expenditure according to its importance for product development and growth.
- Update liquidity planning: Compare expected incoming and outgoing payments regularly with the actual figures.
- Strengthening recurring revenue: Attracting new customers and strengthening existing relationships.
- Planning investments: Take major expenses into account at an early stage.
- Developing scenarios: Calculate the impact of different trends in turnover and costs.
- Preparing financing: Assess in good time when additional capital will be required.
This is not about reducing expenditure to a minimum as a matter of principle. The aim is to use existing capital as effectively as possible.
How can innoWerft help with this?
innoWerft supports founders in further developing their business models and funding strategies, as well as in interpreting key financial indicators. Through coaching and its network of investors, start-ups can improve their capital planning and prepare specifically for the next stages of fundraising.
Frequently asked questions about the cash burn rate
What does ‘cash burn rate’ mean in German?
The term can be translated as ‘capital consumption rate’ or ‘cash consumption rate’. It describes how quickly a company uses up its liquid assets.
What is a good burn rate for start-ups?
There is no universally applicable ideal figure. The amount depends, amongst other things, on the stage of the business, the business model, the available funding and the growth strategy.
Is a high cash burn rate always a bad thing?
No. High expenditure can arise, for example, from investment in product development, staff or market expansion. What matters is whether these investments make good business sense and whether the funding remains secure.
What is the difference between burn rate and cash flow?
Cash flow describes a company’s cash movements over a specific period. The burn rate focuses on how quickly a company is using up its cash reserves.
innoWerft is an early-stage investor and accelerator based in Walldorf, supporting start-ups before or shortly after they are founded by providing capital, coaching and access to a network of investors and businesses to foster sustainable growth.
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