How to calculate and manage your startup's spending rate
Burn rate is the speed at which a startup spends its cash reserves before generating positive cash flow. It is usually expressed as a monthly figure. If your company spends 50,000 pounds per month and earns 20,000 pounds, your gross burn is 50,000 and your net burn is 30,000.
Gross burn rate is your total monthly spending, regardless of revenue. It includes salaries, rent, software subscriptions, marketing spend, and every other expense. Net burn rate is gross burn minus revenue. This is the number that actually matters because it tells you how much cash you lose each month. A company with 100,000 pounds in gross burn and 80,000 in revenue has a net burn of only 20,000. That is a very different situation from a company with the same gross burn and zero revenue. Always track both, but optimise for net burn.
The formula is straightforward. Take your cash balance at the start of the month, subtract your cash balance at the end of the month. That is your net burn for the month. For a more accurate picture, calculate the average over three to six months to smooth out one-off expenses. Example: You start January with 300,000 pounds and end with 270,000 pounds. Your net burn is 30,000 for the month. If your total bank balance is 270,000 and your net burn is 30,000, your runway is 9 months.
There is no universal answer because it depends on your stage, market, and strategy. As a rule of thumb, early-stage startups should aim to have at least 12 to 18 months of runway at their current burn rate. If your runway drops below 6 months and you have not started fundraising, you are in trouble. Investors typically want to see that their money will last 18 to 24 months, giving you enough time to hit the milestones needed for the next round. The biggest red flag is a rising burn rate without a corresponding rise in revenue or clear progress toward product-market fit.
The fastest way to reduce burn is to cut headcount, but that is also the most painful and should be a last resort. Before that, audit your software subscriptions. Most startups pay for tools they barely use. Renegotiate contracts. Switch to annual billing for discounts. Delay hiring until the need is urgent, not anticipated. Move to a smaller office or go fully remote. Cut marketing spend on channels that are not producing measurable results. Every pound saved extends your runway by a fraction of a month, and those fractions add up.