How to calculate burn rate and runway, and why yours is probably wrong.
Every founder should be able to pull up current burn and projected runway at any time. Most can't, and the ones who can are often looking at a number that's off by a couple of months in the wrong direction.
Gross burn and net burn are not the same thing
Gross burn is everything going out the door in a month. Payroll, contractors, software, rent, cloud spend, legal, all of it. It ignores revenue entirely.
Net burn is gross burn minus the cash that came in. This is the number that actually shrinks your bank balance.
So if you spent $180K last month and collected $60K, your gross burn is $180K and your net burn is $120K. Investors usually mean net burn when they ask about burn. Founders usually quote gross, because it's the number sitting at the bottom of their expense report.
One thing to watch. Net burn should use cash collected, not revenue booked. If you invoiced $60K and collected $20K, your net burn last month was $160K, not $120K. Companies with slow-paying customers get burned by this constantly.
Runway is one division problem
Cash in the bank divided by net burn per month. $1.2M in the bank against $120K of net burn is ten months of runway.
That's the easy part. The hard part is that both numbers are less solid than they look.
The three mistakes that inflate a runway number
1. Averaging a period where your spending changed
A lot of founders take the last six months of spend and divide by six. If you hired three people in month five, that average is describing a company that no longer exists. Your real burn is the last full month, adjusted for anything you already know is coming.
Use a trailing three-month view to smooth out one-off lumps, then override it with what you know. Two signed offers starting next month are not a forecast. They're a fact, and they belong in the number now.
2. The books are wrong underneath
This is the one that catches people. Sometimes accountants categorize data incorrectly, and you end up going off the wrong burn rate to calculate your runway. A software subscription booked to COGS instead of operating expense, a founder's reimbursement booked as revenue, a prepaid annual contract expensed all in one month instead of spread across twelve.
None of these are dramatic on their own. Together they can move a burn number by 10 or 15%, which on a ten-month runway is a month and a half you thought you had.
If nobody has looked at your chart of accounts since you set up the accounting software, assume the categorization is wrong somewhere. It usually is.
3. Committed money that hasn't left yet
Signed offer letters. Annual contracts that auto-renew in six weeks. Payroll taxes. The bonus you promised verbally. Your accrued PTO liability if people start cashing out. None of these show up in last month's bank statement and all of them are real.
A runway number that only looks backward will always be optimistic.
Current burn is table stakes. Projected burn is the actual job
Knowing what you burned last month tells you where you've been. What you need is projected burn for the next 12 to 24 months, on current data, that you can pull up any time without asking anyone.
That projection should answer three things. What burn looks like if nothing changes. What it looks like under the hiring plan you're actually running. And what it looks like if revenue comes in 30% under plan, because sometimes it does.
Planning conservatively isn't pessimism. Unexpected expenses and revenue downturns happen, and being prepared for them is how you stay in the game. I budget for the downside case and treat anything better as upside.
What to do when the number comes back short
Founders find out their runway is shorter than they thought fairly often. It's uncomfortable and it's also the most useful thing that will happen to you that quarter, because you found out while you still have options.
The order I'd work in. Fix the data first, because you can't make decisions on a number you don't trust. Then look at timing rather than headcount, since pushing a hire out by two months is cheaper and less destructive than a layoff. Then look at the vendor stack, where there is usually more slack than founders expect. Then talk to your existing investors, early rather than late. Bridge conversations go better at nine months of runway than at four.
The test
You should be able to open one screen and see current burn, projected burn 12 to 24 months out, and runway, on data that's current as of this month. No spreadsheet archaeology, no asking your accountant, no waiting three weeks for a close.
If you can't do that today, that's the gap. It's usually a two to six week fix depending on how far off the books are, and it's the single highest-leverage thing an early-stage company can put in place.
Quick answers.
What is a healthy burn multiple for an early-stage startup?
Burn multiple is net burn divided by net new ARR. Under 1.5 is efficient at Seed and Series A. Between 1.5 and 2 is normal. Above 3 means you're spending three dollars to add one dollar of recurring revenue, which is a conversation you want to have with yourself before an investor has it with you.
How much runway should we have before raising?
Start the raise with at least 9 to 12 months in the bank. Rounds take longer than founders plan for, and negotiating from four months of runway costs you terms. If you're inside six months, that changes what you should be optimizing for right now.
Should burn rate include non-cash expenses like depreciation?
No. Burn is a cash question. Depreciation, amortization and stock compensation don't leave the bank account, so they don't belong in a burn calculation even though they're sitting on your P&L.
How often should we recalculate it?
Monthly, as part of the budget vs. actuals review. Quarterly means you find problems three months after they started, and by then they're expensive.