Most broadly, “burn” (also referred to as “burn rate”) is the amount by which cash spent exceeds cash received for a given period. This scenario is very common, especially for early-stage startups with high growth potential. Developing a product, proving product-market fit, and identifying an appropriate business model all require investments of time and money, often outpacing the ability to generate revenue.
While burn and runway are terms that are used similarly across the industry, there can be variations in the details of terminology and calculation methods. Within this post, we distinguish identify commonly-used terminology and explain Puzzle’s specific method of calculating each metric, including how we intend for our calculation method and naming convention to be as intuitive and useful as possible.
Net burn is a company’s net cash activity for a period.
Net burn is sometimes referred to simply as “burn” since this is the most commonly used version of burn. Burn is frequently calculated for a single month, though calculating average burn for a certain period (e.g. average of burn from the most recent 3 complete months) is common too, in order to smooth out irregularities in cash activity from month to month. Burn includes all the cash in minus all of the cash out during the period, with the exception of non-operating cash activity such as new equity investments or debt financing.
The term “net burn” is commonly used to distinguish from “gross burn,” which refers to the total of all cash spent on operations without including any cash received (e.g. from customer revenue). In Puzzle, gross burn is referred to as “Cash Out” and is included in the Cash Activity Report.
In Puzzle, Cash Out includes both “Cash Out from Operations” and “Other Cash Out,” which includes any non-operating cash activity such as taxes and interest while excluding cash activity related to equity or debt. **
Bank burn is the change in bank account balances between the beginning and end of a period.
This is the simplest version of burn to calculate. It is useful for understanding changes but can be misleading for calculating runway if there are cash activities for financing such as cash received from outside investors, lenders, or employees for options exercises.
<aside> 💡 What if my company is cash flow positive? Do we have positive burn? Even though it’s common for companies to have negative cash flows as startups — the sector where the term “burn” is most frequently used — some startups are able to generate positive cash flows or bootstrap the company using customer revenue to fund growth.
If you have net positive cash flow (congrats! You are default alive!), this would typically not be referred to as “burn.” The most common use of “burn” is that it represents net negative cash flow; as the name suggests, it’s supposed to represent how quickly invested money is being depleted.
At Puzzle, we call net positive cash flow “cash generated” instead of “burn” or “negative burn,” in order to reduce the potential for confusion.
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Burn multiple is how much a startup is spending, on average, to generate incremental ARR for a given period.
Burn multiple is calculated as annualized net burn (for a period of less than 12 months) or annual net burn (for a period of 12 months) divided by net new ARR during that same time period. Net new ARR is equal to New ARR + Expansion ARR - Churned ARR - Contracted ARR. A burn multiple can also be calculated with monthly net burn and MRR.
Since burn multiple captures the ratio of how much cash is being depleted to revenue growth, burn multiple is an indicator of how efficiently a company is growing. Investors will expect this numbers to be as low as possible (below 2.0 or, even better, below 1.0).
Net burn is often used as the basis for calculating runway, making decisions about extending runway (i.e. by reducing net burn), and deciding when to start fundraising.