Burn rate and cash runway: how to calculate them properly

Net burn is the cash a company pays out in a month minus the cash it collects from operations, excluding money raised. Runway is how long the cash lasts: runway (months) = usable cash ÷ forward monthly net burn. The formulas are simple. The trouble is in the inputs: which cash counts, which month of burn to use, and what is already committed but not yet paid. A runway number built on the wrong inputs can be off by months, and the founder usually finds out at the worst time.

Gross burn vs net burn

Both are measured in cash, usually per month.

• Gross burn is the total cash the company paid out in the period: payroll, benefits, rent, software, contractors, marketing, taxes, and any other payments.
• Net burn is gross burn minus the cash that came in from operations, mainly customer collections. Put another way, it is how much the bank balance fell in the month, excluding money raised from investors or lenders.

Gross burn shows the size of the cost base. Net burn shows how fast cash is actually going. A company with $800K of gross burn and $500K of collections has $300K of net burn.

Burn is a cash measure, not a profit measure

Many definitions online describe burn as operating expenses minus revenue. That is close to net loss, and it can differ from cash burn by a wide margin in a software company:

• Annual prepayments. A customer who pays a year up front adds twelve months of cash in one month, while revenue is recognized evenly over the year.
• Collections timing. Revenue is booked when it is earned. Cash arrives when the customer pays, which may be 30, 60 or more days later.
• Non-cash expenses. Stock compensation and depreciation reduce profit but not cash.
• Payments that never hit the income statement. Capitalized software development, equipment purchases and loan principal repayments all use cash.

Decide which of these sit inside burn, write the definition down, and use it every month. Most investors expect burn to include everything that reduces cash except financing inflows. If debt service is excluded, say so.

One month is not a trend

Monthly burn is lumpy. Annual renewals, bonus payouts, insurance premiums and conference spend all land in particular months. Report the current month alongside a trailing three month average, and explain any month that moves sharply.

How to calculate runway properly

The simple formula is:

Runway (months) = cash ÷ monthly net burn

A runway calculator does exactly this division. The work is in getting the two inputs right.

Start with usable cash, not the bank balance

Not every dollar in the bank is available to spend. Subtract:

• Restricted cash, such as a deposit backing a letter of credit for an office lease.
• Minimum cash the company must hold under a loan agreement. If a lender requires a minimum balance, cash below that level is not runway. Breaching the covenant is a much bigger problem than running low; see how venture debt covenants work.
• Cash already spoken for, such as payroll taxes withheld but not yet remitted, or customer deposits that may need to be refunded.

Use forward burn, not last month's burn

Runway is about the future, so the burn rate should be the one the company expects, not the one it had. Adjust for:

• Committed costs. Signed offers, planned hires in the approved budget, new contracts and price increases on renewals.
• Collections timing. Large invoices that are overdue or due soon, and customers who pay slowly.
• Annual prepayments. If a large share of customers pay annually, receipts will be heavy in renewal months and light in others. Averaging them hides the low months when cash is tightest.
• Debt. Interest and principal payments, and when amortization starts if the loan is still in an interest-only period. Venture debt covers how to model it.

The best version skips the division entirely. A monthly cash flow forecast shows the balance month by month, and runway is the month the balance falls below the minimum the company must hold. Over the next quarter, a 13-week cash flow forecast does the same thing week by week. Decipher's 13-week cash flow template is a starting point.

Show a base case and a downside case

One runway number overstates how certain the future is, so show a base case (committed hires, expected collections) and a downside case (slower bookings, a large customer churning or paying late, a costlier hire). Manage to the downside, because it shows how much room there is if the plan slips; cash flow forecasting covers how to build both cases month by month.

A worked example

One fictional Series A software company, looking at its most recent month.

Illustrative figures, not client data.

The bank balance is $6,000K. Divided by $360K of net burn, that suggests about 16.7 months of runway. Now adjust the inputs.

Illustrative figures, not client data.

Illustrative figures, not client data. Flat burn is a simplification; a monthly forecast is more accurate.

Nothing in the adjusted version is pessimistic. Every adjustment is a cost the company has already committed to or cash it cannot use. The gap between 16.7 and 9.5 months is the gap between "start thinking about a raise next year" and "start preparing now".

The burn multiple

Burn rate shows how fast cash goes. The burn multiple shows what the company gets for it. David Sacks of Craft Ventures introduced it in his essay The Burn Multiple:

Burn multiple = net burn ÷ net new ARR

As he describes it, the multiple measures how much a startup is burning to generate each incremental dollar of ARR. The higher the multiple, the more burn each unit of growth costs.

Net new ARR is new ARR plus expansion, minus contraction and churn (the same building blocks as net revenue retention), over the same period as the burn. In the example above, if the company burned $1,080K over the quarter (three months at $360K) and added $600K of net new ARR, the burn multiple is 1,080 ÷ 600 = 1.8x.

Three points make the figure more reliable:

• Match the periods. Burn for the quarter against net new ARR for the quarter. A trailing twelve month view smooths out lumpy quarters.
• Use net new ARR, not bookings. Multi-year contract values, services and one-time fees inflate the denominator.
• Watch collection timing. A quarter with heavy annual prepayments lowers net burn and flatters the multiple. The next quarter can look worse for the same reason.

What changes runway fastest

Using the base case above, here is what common levers do.

Illustrative figures, not client data.

A few patterns hold in most software companies:

• Headcount moves burn the most. Payroll and benefits are usually the largest cash cost, so hiring pace is the biggest lever, which is why headcount planning matters. Pausing a hire before the offer goes out is far easier than reversing it later.
• Collections move cash once. Collecting overdue invoices or moving customers to annual billing up front pulls cash forward. It adds runway, but it does not change the monthly burn.
• Vendor cuts help at the margin. They are worth doing, and rarely enough on their own.
• Revenue is the slowest lever. New bookings take a sales cycle to close and longer to collect. A plan that relies on revenue growth to extend runway carries the most risk.

When to start a raise relative to runway

There is no single right number of months, and invented rules of thumb do not help much. Work backward from the date cash falls below the minimum balance, using the downside case:

1. Preparation. Updating the model, cleaning up metrics, building the data room and the deck. This takes longer if the numbers have not been kept investor-ready.
2. The process. Meetings, follow-ups, partner meetings and term sheet negotiation.
3. Closing. Legal documents, confirmatory diligence and funds arriving.
4. A buffer. Processes often take longer than planned, and a round can fail.

Add the four together. The answer is the latest point to start, not the ideal one. A short runway also weakens the founder's hand: investors can see the cash-out date, and a company that must close has less room to negotiate terms. Starting with more months in hand keeps options open, including deciding not to raise.

If the downside case leaves too little time, change the plan now. Slowing hiring for one quarter costs far less than a rushed raise.

Common mistakes

• Counting funds raised as negative burn. Equity and new debt are financing, not operations. Net burn excludes them.
• Assuming the next round closes on time. Runway should be measured without money not yet in the bank.
• Taking shortcuts covered above. Net loss as burn, runway from the bank balance, last month's burn, one case only, or a burn multiple on mismatched inputs.

How an investor reads your burn and runway

Decipher sets up a company's finance the way an investor or acquirer will read it. On burn and runway, they tend to check the same things.

• Does burn tie to the cash flow statement? Investors often recompute net burn from the bank balances and the cash flow statement. If the deck says $360K and the change in cash says $450K, the difference needs a clear explanation.
• What is in the cash number? Restricted cash, lender minimums and money not yet received will be pulled out. Better to do it first.
• What is the trend? A single month says little. Several quarters of net burn next to net new ARR shows whether growth is getting cheaper or more expensive.
• Is the burn multiple stable and consistently defined? A multiple that improves because ARR definitions changed will be found.
• Is there a downside case? A runway figure with no downside case, or one that quietly assumes the next round, tends to get discounted.
• Does the plan match the raise? The amount being raised should cover the plan to a clear milestone, under the downside case, with room to spare.

A founder who can walk through all six without opening a spreadsheet is in a strong position before the first question is asked. For help building a runway number that holds up in front of investors, see Decipher's fractional CFO services.