Burn rate: how fast a small shop is consuming its cash reserves.
Burn rate is the net cash flowing out of the business each month — the speed at which your reserves shrink when costs are running ahead of revenue.
Burn rate is the rate at which your business is consuming cash — net cash outflow per month. It is the metric that startups made famous, but every seasonal cafe, every winter-quiet boutique, every salon opening a new location lives on the same arithmetic. Formula in its simplest form: Burn rate = Starting cash − Ending cash, divided by the number of months. Pair it with cash runway and you know exactly how long the current operating shape is survivable. nouz tracks daily EBIT alongside cash so you can see burn coming weeks before the bank balance does.
TL;DR
Definition, in shop-owner English
Gross burn is everything cash that left the bank in a month — rent, payroll, supplier invoices, software, tax payments, owner draws. Net burn is gross burn minus the cash that came in (revenue collected, not revenue invoiced). Net burn is the figure that matches the change in your bank balance — what most owners mean when they say "we burned €4.000 last month."
Burn rate is a cash metric, not a profit metric. A shop can have a perfectly healthy EBIT and still burn cash — for example, if it just paid for six months of stock upfront. And a shop can be profitless on the P&L and still build cash — if customers prepay for a year and the costs are spread monthly. Cash and profit are not the same number. See cash flow vs profit for the full reconciliation.
For most small shops most of the time, profit and cash track each other closely. Burn rate becomes critical in two scenarios: a seasonal off-season (winter for ski-town cafes, summer for indoor businesses), and a deliberate investment (new location, equipment purchase, marketing push). In both, you are accepting some weeks of burn in exchange for later upside.
The formula and a worked example
Gross burn = Total monthly cash outflows
Net burn = Cash outflows - Cash inflows
Avg net burn (3m) = (Cash at start of 3m - Cash at end of 3m) / 3A boutique with €22.000 in the bank at the start of January. By the end of March: €14.500 left. The winter quarter was the predictable quiet season.
| Month | Cash inflows | Cash outflows | Net burn | Cash at end |
|---|---|---|---|---|
| January | €8.400 | €11.200 | +€2.800 | €19.200 |
| February | €7.100 | €10.800 | +€3.700 | €15.500 |
| March | €9.300 | €10.300 | +€1.000 | €14.500 |
| 3-month total | €24.800 | €32.300 | +€7.500 | €14.500 |
| Avg monthly net burn | — | — | €2.500 | — |
Average net burn for the quarter: €2.500/month. With €14.500 left at end of March and April-May still likely loss-making, the cash runway is roughly 5,8 months at the current rate — enough to reach the summer recovery, but only just. The interesting decisions happen here: would a stock-clearance sale or a short-term reduction in marketing flatten the burn? Or is the right move to do nothing and trust the seasonal recovery?
When burn rate matters most
For a profitable, steady shop, burn rate is uninteresting most months — net cash is roughly flat or building. The metric earns its keep in four specific situations.
| Situation | Why burn rate matters | What to watch |
|---|---|---|
| Seasonal off-season | Predictable cash drawdown for 2-4 months. | Compare actual burn to last year's same months. If burn is 30%+ higher, something structural has changed. |
| Opening a new location | Months of cash out before revenue ramps. | Set a stop-loss: "If we are still burning €6.000/month by month 5, we pause hiring." |
| Post-bad-quarter recovery | Reserves got depleted; need to know how long the current burn is survivable. | Net burn / cash on hand = runway in months. Below 4 months, cut something. |
| Pre-loan or investor conversation | Lenders ask "how much cash do you go through in a month?" | Have a clean 6-month average of gross and net burn ready. |
Outside these four, burn rate is a sanity check more than a daily metric. The owner of a profitable salon does not need to track burn rate weekly. They do need to glance at it once a quarter to confirm the reserve is building, not shrinking.
Why it matters for daily P&L
Burn rate is the early-warning version of "are we running out of money?" — and it answers that question weeks before the bank balance does. A shop with €12.000 in the bank and €3.000/month of net burn has roughly four months of runway. A shop with €12.000 and €1.000/month of burn has a year. The same bank balance, two completely different situations.
The link to daily P&L is direct: persistent negative EBIT becomes burn within weeks. A cafe that runs at −€80/day EBIT will burn roughly €2.400 of cash in a month, give or take working-capital movements. Catching the negative EBIT trend on day three is the difference between a fixable problem and a depleted reserve.
For the pair calculation, see cash runway. For the cash-vs-profit reconciliation, see cash flow vs profit.
Related concepts
- Cash runway — burn rate's sibling metric: how long until the reserves run out.
- Cash flow vs profit — why burn rate and EBIT are not the same number.
- Seasonal business financial planning — managing a predictable burn season.
- What fixed costs actually mean — the cost layer that drives most burn rate.
FAQ
What is burn rate for a small business?
Burn rate is the net cash outflow per month — the speed at which your reserves shrink when costs run ahead of revenue. Net burn (outflows minus inflows) is the figure that matches the change in your bank balance. A €3.000/month net burn means the bank account drops by roughly €3.000 each month at the current operating shape.
What is the difference between gross burn and net burn?
Gross burn is total monthly cash outflows — every euro that left the bank. Net burn is gross burn minus cash inflows. Gross burn answers "how much does this business cost to operate?" Net burn answers "how fast are the reserves shrinking?" Net burn is the more useful number for runway planning.
Is burn rate the same as a loss on the P&L?
No. Cash flow and profit are not the same number. A shop can burn cash while turning a paper profit (for example, after paying a year of stock upfront) or build cash while showing a loss (for example, after a year of customer prepayments). See cash flow vs profit for the reconciliation.
How often should I track burn rate?
For most profitable shops, quarterly is enough — burn is uninteresting when cash is steady or building. Track it monthly during a seasonal off-season, a new-location opening, or any post-bad-quarter recovery. The 3-month rolling average smooths the single-month noise from supplier-invoice timing.