What is burn rate?

Burn rate measures how quickly a business consumes cash, typically expressed as a monthly cash outflow. For professional service firms, burn rate is calculated as monthly operating expenses minus monthly revenue (if negative) or simply monthly payments (for early-stage firms). A consulting firm spending $180,000 monthly with $150,000 revenue has a $30,000 monthly burn rate. Burn rate combined with cash balance determines runway: $300,000 in cash with $30,000 in monthly burn provides 10 months of runway. Monitoring burn rate is critical for businesses that are not yet profitable or experiencing rapid growth.

Key characteristics of burn rate

• Gross burn: Total monthly cash outflows (all expenses)

• Net burn: Monthly revenue minus monthly expenses (if negative)

• Measured: On a monthly basis, though weekly tracking is common in startups

• Components: Payroll, contractors, rent, marketing, software, and all operating costs

• Calculated: (Beginning Cash - Ending Cash) / Number of Months

Why burn rate matters for service firms

Burn rate determines the survival timeline and the sustainability of growth. A consulting firm with $400,000 cash and $40,000 monthly burn has 10 months to achieve profitability or secure additional funding. Reducing burn rate extends runway: cutting burn from $40,000 to $28,000 extends a 10-month runway to 14+ months, providing more time for revenue growth. High burn rates during growth are acceptable if the path to profitability is clear, but perpetual burn without a profitability plan indicates an unsustainable business model. Weekly burn-rate monitoring enables rapid cost adjustments before cash runs out.

Example: Burn rate calculation and runway analysis

Early-stage consulting firm (Month 3):

Cash position:

• Beginning cash: $450,000 (founder investment)

• Current cash: $335,000

• Cash consumed: $115,000 over 3 months

• Monthly burn rate: $38,333

Current month breakdown:

• Revenue: $42,000

• Expenses: $78,000

• Net burn: -$36,000

Expense details:

• Payroll (4 employees): $48,000

• Contractors: $12,000

• Rent & office: $6,500

• Marketing: $8,200

• Software & tools: $2,400

• Professional services: $900

• Total: $78,000

Runway calculation:

• Current cash: $335,000

• Monthly burn: $38,333

• Runway: 8.7 months

Growth trajectory:

Month 1:

• Revenue: $28,000

• Expenses: $72,000

• Net burn: -$44,000

Month 2:

• Revenue: $35,000

• Expenses: $75,000

• Net burn: -$40,000

Month 3 (current):

• Revenue: $42,000

• Expenses: $78,000

• Net burn: -$36,000

Positive trend: Burn declining as revenue grows

Projection scenarios:

Scenario 1: Current trajectory continues

• Month 6: Revenue $65,000, expenses $84,000, burn -$19,000

• Month 9: Revenue $90,000, expenses $90,000, breakeven

• Month 12: Revenue $120,000, expenses $95,000, profit +$25,000

• Cash at breakeven (Month 9): $120,000 remaining

• Result: Achieves profitability within the runway ✓

Scenario 2: Aggressive hiring (add 2 FTEs, Month 4)

• New burn: $60,000/month

• Runway: 5.6 months

• Month 9 revenue: $105,000

• Month 9 expenses: $110,000

• Still burning at Month 9

• Result: Runs out of cash before profitability ✗

Scenario 3: Cost reduction + revenue focus

• Reduce expenses to $72,000 (cut marketing, delay hire)

• New burn: $30,000/month

• Runway: 11+ months

• Month 8: Revenue $85,000, breakeven

• Cash at breakeven: $185,000 remaining

• Result: Faster profitability, more cash buffer ✓

Management decisions:

• Choose Scenario 3 (disciplined growth)

• Target breakeven in 8 months

• Maintain a 6+ months cash buffer post-breakeven

• Reinvest profits after 3 months of positive cash flow