Runway and Burn Rate Math That Holds Up

Runway is the simplest number in finance — cash divided by monthly burn — and one of the most commonly wrong. Not because the arithmetic is hard, but because both inputs invite flattery.

Gross burn vs. net burn

Gross burn is total cash out per month: payroll, rent, software, everything. Net burn is cash out minus cash in — what the bank balance actually loses each month. Runway is cash divided by net burn, and that is where the trouble starts, because net burn depends on revenue that has not happened yet.

The three flattering mistakes

1. Using your best collections month. Net burn bounces. A month where two big receivables landed makes burn look low; divide by that and your eighteen months of runway is really eleven. Use a trailing three-month average at minimum, and a forward forecast if you have one.

2. Counting deferred revenue as yours. Annual prepayments drop cash in the bank that you have not earned. Runway computed against that gross cash number assumes customers will keep prepaying at the same rate — precisely the assumption that fails in a downturn. The cleaner view: cash minus deferred revenue, divided by net burn. It is a harsher number. It is also the one that will not surprise you.

3. Freezing today’s costs. If you signed three offer letters this month, your burn is not last month’s burn. Runway should be computed against the committed cost base — everything already promised — not the trailing one.

The calculation that holds up

Runway (months) = (cash − customer prepayments not yet earned) ÷ forward net burn at committed headcount

A board, a lender, or a serious investor will get to roughly this number within minutes of opening your books. Getting there first is cheap; being corrected in the meeting is not.

When the number gets uncomfortable

The standard advice is that fundraising takes six months, so act at twelve. What the averages hide is that options expire before cash does. At twelve months you can raise, cut, or push on collections. At six, the raise happens on the investor’s terms. At three, the only lever left is the payroll one.

This is why runway belongs next to the 13-week cash forecast rather than in a pitch deck: the forecast shows the shape of the decline weekly, catches the bad quarter early, and turns runway from a static boast into a managed number.

The rest of the cash toolkit lives in Cash Flow & Forecasting. And if you want a sanity check on whether your books can even produce these numbers reliably, run the books health check — the cash questions are the ones founders most often miss.