# 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.

Source: https://lopifi.com/learn/how-to-calculate-burn-rate-and-runway
Part of: Lopifi — US GAAP books on autopilot, checked by a CPA (https://lopifi.com)

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**How do I calculate burn rate and runway for my startup?** 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](https://lopifi.com/md/glossary/runway), and it's built from [gross burn](https://lopifi.com/md/glossary/gross-burn) and [net burn](https://lopifi.com/md/glossary/net-burn), measured from the bank, not the [P&L](https://lopifi.com/md/glossary/p-and-l).

*[Figure: burn runway]*

Northwind's September: $35,352.60 of cash, $51,907.40 out of the bank, $27,260 in from customers.

## 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.

> “A clear definition of the metric and how it is calculated; A statement indicating the reasons why the metric provides useful information to investors; and A statement indicating how management uses the metric in managing or monitoring the performance of the business.”

— [SEC Release 33-10751 (January 2020) — Commission Guidance on MD&A: key performance indicators](https://www.sec.gov/rules/interp/2020/33-10751.pdf) (PDF), A metric needs its definition, its calculation and why it is used

*[Account register: 1000]*

Every movement through 1000 Cash in September. This is the only input burn needs.

**Exercise — Work out September's burn from the bank.** Use the cash register above. Total every payment for gross burn, total every receipt except the founders' share money, take one from the other for net burn, and divide closing cash by net burn for runway in months, to one decimal. Type it in the workbook at https://lopifi.com/playground.

| Line | Amount |
| --- | --- |
| Gross burn: all cash out | 51,907.40 |
| Less: cash in from customers | (27,260) |
| Net burn | 24,647.40 |
| Cash at September 30 | 35,352.60 |
| Runway on net burn | 1.4 months |
| Runway on gross burn (if nobody paid) | 0.7 months |

September's burn, read off the bank account. Financing (the founders' share money) is excluded from cash in.

> **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](https://lopifi.com/md/learn/how-to-calculate-burn-rate-and-runway/run-rate-and-one-offs) takes them out, by name.

*[Figure: cash flow waterfall]*

Where September's cash went, by section of the cash flow statement.

> **Not in burn.** [Depreciation](https://lopifi.com/md/glossary/depreciation) and [stock-based compensation](https://lopifi.com/md/glossary/stock-based-compensation) are expenses that move no cash, so they stay out of burn. A [prepaid](https://lopifi.com/md/glossary/prepaid-expense) and a [capital purchase](https://lopifi.com/md/glossary/capital-expenditure) move cash and aren't expenses yet, so they're in it. That's why burn comes from the bank and not the income statement.

**Last month's net burn**
- Pro: Simple, and anyone can rebuild it from the bank statement
- Con: 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**
- Pro: Smooths one-off months without anyone choosing what to drop
- Con: Needs three closed months; a first quarter doesn't have them
- Con: Lags a real change in spending
- Best for: Investor updates and board packs

**Run rate, one-offs named**
- Pro: Shows what a normal month costs
- Pro: Makes the judgment visible
- Con: 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)**
- Pro: Includes what's already committed: payroll, bills, tax deposits
- Con: 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

Four ways to state runway. Each answers a different question; none is wrong if it's labeled.

1. **Close and reconcile cash.** Burn is a cash question, so start from a reconciled bank balance, never an unreconciled one.
2. **Total cash out.** Total the month's payments. That's gross burn.
3. **Total cash in, excluding financing.** Total receipts, leaving out equity raised and loans drawn. Subtract from gross burn for net burn.
4. **Name the one-offs.** List anything that won't repeat at its size: equipment bought outright, annual prepayments, a legal settlement.
5. **Divide, and label.** Divide cash by net burn. State the burn, the window and the one-offs in the same sentence.

Burn and runway, every month.

**Northwind — How the founders report it.** "Cash at September 30 was $35,352.60. Net burn was $24,647.40, which includes $31,200 of one-offs (the van and a year of insurance). Without them, September's pattern adds $6,552.60 a month. We'll quote a trailing three-month figure from December, when we have three months."

**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

- [Run rate and one-offs](https://lopifi.com/md/learn/how-to-calculate-burn-rate-and-runway/run-rate-and-one-offs) — 5 min. What is run-rate burn, and how do I handle one-off costs in runway?

## Where this lesson's rules come from

- [SEC Release 33-10751 (January 2020) — Commission Guidance on MD&A: key performance indicators](https://www.sec.gov/rules/interp/2020/33-10751.pdf) (PDF) — A metric needs its definition, its calculation and why it is used (sec)
- [Wikipedia, “Burn rate”](https://en.wikipedia.org/wiki/Burn_rate) — Burn rate — background (reference)
- [ASC 230-10-45-10](https://asc.fasb.org/230/tableOfContent) — Cash flows are classified as operating, investing or financing (codification)

## Read further

- https://lopifi.com/md/journal-entries/equipment-purchase
- https://lopifi.com/md/journal-entries/prepaid-insurance
- https://lopifi.com/md/calculators/free-cash-flow
- https://lopifi.com/md/calculators/cash-ratio
- https://lopifi.com/md/differences/gross-burn-vs-net-burn
- https://lopifi.com/md/differences/capex-vs-opex
- https://lopifi.com/md/differences/accrual-vs-cash-basis
- https://lopifi.com/md/startups/burn-rate-and-runway
- https://lopifi.com/md/startups/cash-flow-statement-explained
- https://lopifi.com/md/accounting/burn-rate
- https://lopifi.com/md/accounting/runway
- https://lopifi.com/md/accounting/cash-flow
- https://lopifi.com/md/docs/domain/10-metrics
- https://lopifi.com/md/docs/domain/07-cash-and-treasury

- **Track:** [Finance](https://lopifi.com/md/learn/finance)
- **Lesson:** Lesson 1 of 8 — 8 min
- **Terms taught:** [Gross burn](https://lopifi.com/md/glossary/gross-burn), [Net burn](https://lopifi.com/md/glossary/net-burn), [Runway](https://lopifi.com/md/glossary/runway), [Run rate](https://lopifi.com/md/glossary/run-rate), [Months of cash](https://lopifi.com/md/glossary/months-of-cash), [Capital expenditure](https://lopifi.com/md/glossary/capital-expenditure), [Prepaid expense](https://lopifi.com/md/glossary/prepaid-expense), [Stock-based compensation](https://lopifi.com/md/glossary/stock-based-compensation)
- **Previous:** [Lower of cost and net realizable value, Accounting · Lesson 17](https://lopifi.com/md/learn/inventory-and-cost-of-goods-sold/lower-of-cost-and-net-realizable-value)
- **Next:** [Run rate and one-offs](https://lopifi.com/md/learn/how-to-calculate-burn-rate-and-runway/run-rate-and-one-offs)
- **The course:** https://lopifi.com/md/learn