Cash Burn: Overview, Formula, Examples

By Jeremy Bowman – Updated Jul 25, 2025 at 2:56 PM EST | Fact-checked by Frank Bass

Key Points

Cash burn measures cash losses, important for start-up survival and growth.
Investors use net cash burn to assess a company's runway and financial health.
Rule of 40 helps determine if a start-up's growth justifies its cash burn rate.

Cash burn is a key concept for investors to understand, especially those investing in start-ups, or companies that are losing money. Cash burn refers to cash losses, typically measured by operating cash flow.

Cash burn, or cash burn rate, is the rate at which a company is using up its cash reserves, or how much cash it is losing each quarter from operating the business.

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A one hundred dollar bill burning from the center outward. — Image source: Getty Images.

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For early-stage companies working towards profitability, cash burn is one of the most important, if not the most important, metrics to manage. Cash burn is essentially a balance for companies between investing in growth without investing so much that they run out of cash. It's key for start-ups to manage cash burn so that they can grow the business at a reasonable pace while ensuring that it doesn't go bankrupt.

Cash burn plays a role in another key metric for start-ups: the Rule of 40. According to the Rule of 40, which was popularized by a venture capitalist a decade ago as a guideline for investing in software companies, a start-up is worth investing in if its revenue growth rate and free cash flow margin combined is at least 40. In other words, a start-up can get away with burning cash if its revenue growth is strong enough. A company with 50% revenue growth and 10% free cash flow margin would still qualify, since 50 minus 10 equals 40. Similarly, a start-up would be investable with a 20% free cash flow margin loss if the revenue growth rate were 60%.

Free cash flow margin isn't identical to cash burn rate because cash burn takes into account the amount of cash on the balance sheet, but the concept is similar, as it applies to the Rule of 40 and investing in start-ups.

It's important to note that the Rule of 40 isn't a hard-and-fast rule but more of a guideline often used in the software industry.

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About the Author

Jeremy Bowman has been a contributing Motley Fool stock market analyst, covering technology, consumer goods, and macroeconomic trends since 2011. Before The Motley Fool, Jeremy was a newspaper reporter, restaurant manager, and English teacher abroad. He holds a bachelor’s degree in English from Colorado College and a master’s degree in business administration from American University. One of his Motley Fool headlines was briefly featured on Late Night with Stephen Colbert.

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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.