What is Burn Rate? (Definition + SaaS example)
Burn rate is the speed at which a company spends its cash reserves, typically measured as net cash outflow per month. In SaaS, burn rate determines runway — the number of months a company can continue operating before running out of cash, making it the most watched metric at pre-profit startups.
Formula and Calculation
Gross Burn Rate
Gross Burn Rate = Total Monthly Cash Outflow
Net Burn Rate
Net Burn Rate = Monthly Cash Outflow − Monthly Cash Inflow
Runway
Runway (months) = Cash Balance ÷ Net Burn Rate
Worked SaaS Example
A Series A SaaS company with $4M in the bank has the following monthly cash flow:
| Category | Monthly Amount |
|---|---|
| Engineering salaries | $120,000 |
| Sales & marketing | $80,000 |
| Infrastructure (cloud, tools) | $25,000 |
| G&A (rent, legal, admin) | $15,000 |
| Gross Burn Rate | $240,000 |
| − Monthly revenue (MRR) | $90,000 |
| Net Burn Rate | $150,000 |
| Metric | Value |
|---|---|
| Cash balance | $4,000,000 |
| Net burn rate | $150,000/month |
| Runway | 26.7 months |
Runway Scenarios
| Scenario | Net Burn | Runway |
|---|---|---|
| Current (MRR $90K) | $150,000 | 26.7 months |
| MRR grows to $150K | $90,000 | 44.4 months |
| MRR grows to $240K (breakeven) | $0 | Infinite |
| Emergency cut (reduce spend 30%) | $78,000 | 51.3 months |
Burn Multiple
The burn multiple measures how efficiently cash burn converts to revenue growth:
Burn Multiple
Burn Multiple = Net Burn ÷ Net New ARR
| Burn Multiple | Rating |
|---|---|
| < 1x | Excellent — adding more ARR than burning |
| 1–1.5x | Good — efficient growth |
| 1.5–2x | Acceptable — typical for growth stage |
| > 2x | Concerning — burning too much for the growth generated |
Why Burn Rate Matters for SaaS
Finance teams use burn rate to manage the company's most critical constraint: time. Every dollar spent reduces runway, and runway determines whether the company reaches profitability or the next funding milestone. Weekly burn monitoring is standard practice at pre-profit startups.
In investor reporting, burn rate signals capital discipline. Investors compare burn rate to growth rate — spending $200K/month to add $50K in net new MRR (burn multiple of 4x) raises efficiency concerns. Spending $200K/month to add $200K in net new MRR (1x burn multiple) is excellent.
A common mistake is using gross burn rate for runway calculations instead of net burn. A company spending $300K/month with $200K in revenue has 10 months of runway on $1M cash — not 3.3 months. The reverse mistake — assuming revenue will keep growing when calculating runway — is equally dangerous. Use current net burn for conservative planning.
Burn rate connects to the Rule of 40 through its impact on profit margin, and to ARR through the burn multiple metric. Companies with strong run rates and declining burn are on the path to profitability — the most important inflection point in a SaaS company's lifecycle.
Track your burn rate and runway in JustPaid
Frequently Asked Questions
Gross burn rate is total monthly cash outflow before revenue. Net burn rate subtracts monthly revenue from outflow. A company spending $200K/month with $80K in revenue has a gross burn of $200K and a net burn of $120K. Runway calculations should use net burn rate.
Related Terms
Run Rate
Run rate is an annualized projection of future revenue based on current period performance. In SaaS, run rate is typically calculated by multiplying the most recent month's revenue by 12, providing a forward-looking estimate of annual revenue if current conditions remain unchanged.
ARR (Annual Recurring Revenue)
Annual Recurring Revenue (ARR) is the annualized value of a SaaS company's committed recurring subscription revenue. ARR equals MRR multiplied by 12 and usually excludes one-time fees, services, and purely variable usage, making it a standard metric for investor reporting, valuation, and annual planning.
Rule of 40
The Rule of 40 is a SaaS performance benchmark stating that a healthy software company's combined revenue growth rate and profit margin should equal or exceed 40%. It balances growth and profitability — a company growing at 60% with a -20% margin passes, as does a company growing at 10% with a 30% margin.
