Burn rate and runway, from the bank
Gross burn, net burn and runway worked on Northwind's September from the bank account, with the one-offs named and the run rate shown beside them.
Northwind closed September with $35,352.60 in the bank and a profit of $1,747.40. Neither number answers the question an investor asks first: how long does the cash last? That's runway, and it's built from gross burn and net burn, measured from the bank, not the P&L.
Gross burn and net burn
Gross burn is every dollar that left the bank in the month, before anything came in. It's the cost base: what a month costs if no customer pays. Net burn is gross burn less the cash that came in, excluding financing. Money from investors or a loan extends runway but never reduces burn, or a company could cut its burn by raising money. Runway is cash divided by monthly net burn. It's a metric, not a GAAP figure, so its definition has to travel with it.
Runway is a division with two inputs, and both are choices. Say which burn and which window, every time.
By September's own net burn, Northwind has 1.4 months. That's arithmetically right and badly wrong, because September bought a van and a year of insurance. Run rate and one-offs takes them out, by name.
Last month's net burn
- Good at
Simple, and anyone can rebuild it from the bank statement
- Watch for
One lumpy month (an annual prepayment, a big collection) can halve or double it
- Best for
- A first look, and only with the month named
Trailing three-month average
- Good at
Smooths one-off months without anyone choosing what to drop
- Watch for
- Needs three closed months; a first quarter doesn't have them
- Lags a real change in spending
- Best for
- Investor updates and board packs
Run rate, one-offs named
- Good at
- Shows what a normal month costs
- Makes the judgment visible
- Watch for
The list of one-offs is a judgment, and a generous list flatters the answer
- Best for
- Planning hires, alongside the reported figure
Forecast (13-week, or the operating model)
- Good at
Includes what's already committed: payroll, bills, tax deposits
- Watch for
Takes work to build and has to be rolled forward weekly
- Best for
- When cash is tight, or before a hire or a big purchase
Step 1: Close and reconcile cash
Burn is a cash question, so start from a reconciled bank balance, never an unreconciled one.
Step 2: Total cash out
Total the month's payments. That's gross burn.
Step 3: Total cash in, excluding financing
Total receipts, leaving out equity raised and loans drawn. Subtract from gross burn for net burn.
Step 4: Name the one-offs
List anything that won't repeat at its size: equipment bought outright, annual prepayments, a legal settlement.
Step 5: Divide, and label
Divide cash by net burn. State the burn, the window and the one-offs in the same sentence.
In this lesson: why September's own runway is misleading, and how to state a run rate without hiding the judgment behind it.
Pages in this lesson
1 page goes deeper, about 5 minutes in all. Read them in order, or open the one you need.
Where this lesson's rules come from
The sources behind this lesson's requirements, by kind. Background reading explains; it is never the authority for a rule. Anything marked as a convention is ours, not the rule-maker's.
- US GAAP
- ASC 230-10-45-10 (opens in a new tab)Cash flows are classified as operating, investing or financingFree after registration
- SEC
- SEC Release 33-10751 (January 2020) — Commission Guidance on MD&A: key performance indicators (opens in a new tab)A metric needs its definition, its calculation and why it is usedPDF · Free to read
- Background reading — not an authority
- Wikipedia, “Burn rate” (opens in a new tab)Burn rate — backgroundFree to read
The full map is in US GAAP, and where these rules come from.
The words this lesson teaches
Each links to its glossary definition, which also names the authority behind it and the components that render it.
- Gross burnGross burn is a cash and runway metric, calculated as All cash out in the month, before any cash in.Convention
- Net burnNet burn is a cash and runway metric, calculated as Gross burn − cash in, excluding financing inflows.
- RunwayRunway is a cash and runway metric, calculated as Cash ÷ net monthly burn.Convention
- Run rateOne period's figure with named one-offs removed, as a measure of what a normal period looks like — run-rate burn, run-rate revenue. Always shown beside the reported figure, with the one-offs listedConvention
- Months of cashMonths of cash is a cash and runway metric, calculated as Same as runway.Convention
- Capital expenditureCash spent acquiring or improving long-lived assets in the period — the investing outflow free cash flow subtracts
- Prepaid expenseCash paid before the benefit is consumed — an asset until it is. "Prepayment" is the UK and IFRS word for the same asset; a customer paying us early is a customer advance or deposit, a liability
- Stock-based compensationThe cost of equity awards — options, RSUs, restricted stock — measured at grant-date fair value and recognized as expense over the service period. Non-cash, so added back in operating cash flow, but a real cost
In the founder glossary
This lesson’s ideas, explained for the founder running the company. Each has an entry in the founder glossary.
See also
- Metric definitionsEvery metric in this system ships with its formula, period, inputs and source. A KPI without a definition is a number people argue about in meetings.
- Cash & treasuryCash is the only balance sheet account where an independent third party, the bank, says what the balance should be. That makes it the easiest account to verify and the one where a break hurts most.
- Journal entry for an equipment purchaseWhen equipment is bought, debit the fixed asset account for its full cost (price plus delivery and installation) and credit Cash or Accounts payable. Nothing is expensed on the day of purchase; the cost reaches the P&L as depreciation.
- Journal entry for prepaid insuranceWhen the premium is paid, debit Prepaid insurance and credit Cash. At each month-end, debit Insurance expense and credit Prepaid insurance for the month's share of the policy, until the prepaid balance reaches zero.
- Free cash flow calculatorFree cash flow is a cash and runway metric, calculated as Operating cash flow − Capital expenditures.
- Cash ratio calculatorCash ratio is a liquidity and working-capital metric, calculated as Cash and equivalents ÷ Current liabilities.
- Gross burn vs net burnGross burn is all the cash a company spends in a month. Net burn subtracts the cash it collects, and runway is computed from net burn.
- CapEx vs OpExCapital expenditure buys an asset that will serve for more than a year, so its cost is depreciated over that life. An operating expense is used up in the period and hits the P&L in full right away.
- Accrual basis vs cash basisCash basis books revenue and expenses when money moves. Accrual books them when they're earned or incurred, so a year of insurance paid up front is one month's expense on cash basis and a twelfth a month on accrual.
- Burn rate and runway: how to calculate them correctlyGross burn, net burn and months of runway, done the way an investor checks them: from cash, averaged, and with the hires you’ve already committed to.
- Cash flow statement explained: why profit isn’t cashHow the cash flow statement starts at net income, adds back non-cash costs and working capital, splits three activities and ties to the balance sheet.
- Cash flow statementWhere cash came from and where it went during a period, split into operating, investing and financing activities.
- RunwayCardMonths of runway with a burn line.
- KpiCardMetric + delta + optional sparkline.
- CashFlowStatementOperating / investing / financing.
- MetricDefinitionEvery metric requires one. Formula with values substituted.