Software Growth

Burn rate

Burn rate is how much cash your company loses each month. Gross burn is total monthly spending, and net burn is spending minus the cash coming in.

Burn rate is the speed at which you use up cash. If you have revenue below your expenses, you burn the difference from your bank balance, and that balance decides how long you can keep going. The a16z guide to startup metrics points out that companies fail when they run out of cash with too little time left to raise more.

Gross burn and net burn

The a16z guide defines gross burn as monthly expenses plus any other cash outlays, and net burn as revenue minus gross burn, which it calls the true measure of the cash a company burns each month. Bessemer's wording is similar: gross burn counts all expenses paid in the month, and net burn is the cash received minus expenses.

Example: your SaaS pays out $25,000 a month (salaries, contractors, hosting, tools, ads) and collects $10,000 from customers.

Gross burn is $25,000. The gap between the two shrinks as revenue grows. Investors focus on net burn because it feeds runway.

Use cash, not accounting profit

Burn is a cash measure. A customer who pays $1,200 up front for a year helps cash right away, even though revenue is recognized monthly. SaaS Capital warns that annual prepayments flatter cash flow, and that when growth slows the benefit shrinks, so a company can burn cash even when its P&L improves.

What is a sensible burn?

There is no universal number. It depends on stage, cash and growth. The question is whether the burn buys growth worth having. The burn multiple measures that by dividing net burn by net new ARR. If your net burn is falling while revenue grows, you are moving toward default alive.

For bootstrapped and small teams

  • Many bootstrapped companies have zero or negative burn, meaning profit. Then the question changes to how much profit to reinvest.
  • Treat founder salary as real. A burn that excludes your own pay hides a problem.
  • Watch the fixed part: salaries and annual contracts are hard to cut quickly, while ad spend is easy.

Common mistakes

  • Mixing up gross and net burn when quoting runway.
  • Using one unusually good or bad month. Average three months.
  • Forgetting upcoming large payments such as annual software bills or taxes.
  • Ignoring that burn rises when you hire, so plan against the post-hire number.

A simple monthly habit

On the first of each month, write down cash in the bank, cash in, cash out, net burn, and the resulting runway. Keep a running table. Trends matter more than any single month: if net burn is flat while revenue grows, you are improving, and if it rises faster than revenue, something needs to change. Share the table with any cofounder or investor, so everyone is working from the same numbers.

Sources

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