Gross burn, net burn
Gross burn is everything the company spends in a month: payroll, rent, software, contractors, cloud. Net burn is gross burn less the cash that came in, mostly from customers. Runway is your cash balance divided by net burn. A company with $2.4 million in the bank and $200,000 of net burn a month has twelve months.
Measure all three from cash, not from the P&L. Burn is a cash question, and the income statement leaves out things that spend cash (equipment, an annual prepayment, paying down a loan) and includes things that don’t (stock-based compensation, depreciation).
Why one month lies
Cash moves in lumps. An annual software contract paid in January, a customer’s yearly invoice collected in March, a quarterly tax payment: any single month can be far from the run rate. Use the average of the last three months, and then look at what is about to change.
Runway is a forecast, so it should include what you’ve already committed to: the engineers starting next quarter, the lease you just signed, the price increase from your cloud provider. Revenue you hope to close shouldn’t be in it. Investors will rebuild the number from your statements, and a 13-week cash flow is how you check it week by week.
A worked example. Cash is $2,400,000. Net burn over the last three months was $180,000, $230,000 and $190,000: an average of $200,000, so twelve months on today’s burn. Two engineers start next quarter at a fully loaded $20,000 a month each, salary plus employer taxes and benefits. Net burn becomes $240,000, and runway is $2,400,000 ÷ $240,000, or ten months. Two months disappear without anyone spending a dollar yet, which is why committed costs belong in the number before they hit the bank.
- Gross burn
- Everything out, in a month
- Net burn
- Out, less what came in
- Runway
- Cash ÷ net burn, in months
What closed books add
Burn taken from books that close every month can be split by what drives it: headcount, infrastructure, sales and marketing. That split is what makes the burn multiple (net burn divided by net new ARR) mean something, and it answers the next question in every board meeting, which is which lever moves runway the most.
The burn multiple uses the same period on both sides. A company that burned $600,000 in a quarter and added $400,000 of net new ARR has a burn multiple of 1.5: it spent $1.50 for each dollar of new recurring revenue. Lower is better, and a multiple taken from books that don’t close is a guess divided by a guess.
Common questions
How many months of runway should a startup have?
There’s no rule, but common advice is to raise enough for 18 to 24 months, and to start raising the next round with plenty left, because a round can take months to close. Below that, cutting burn is usually cheaper than raising in a hurry.
Should runway include expected revenue growth?
Keep two numbers. The conservative one assumes revenue stays where it is today, and it’s the one to plan hiring against. The other includes the growth you expect, clearly labeled as a plan. Mixing them into one figure is how a company finds out about its runway from its bank balance.
Does stock-based compensation count toward burn?
No. Stock-based compensation and depreciation are expenses on the P&L but spend no cash, so they don’t belong in burn. The reverse also holds: buying laptops, prepaying a year of software or repaying a loan spends cash without showing up as an expense in that month, and all of them belong in burn.
What does “default alive” mean?
Paul Graham’s phrase for a company that reaches profitability on its current cash, if its expenses stay where they are and revenue keeps growing at its recent rate. It’s a useful second question after runway: not just how long the money lasts, but whether the business gets to break even before it runs out.
Deciding who keeps your books? inDinero vs Lopifi: outsourced accounting · Fractional CFO vs Lopifi: what each does
Terms in this guide
Each one has its own page in the founder glossary. Hover for the short version, or open the full entry.
Keep going
From here: a free tool to try it on your own numbers, the lesson behind it and the state guides that cite it.
- Free toolPrepaid & deferred releaseA premium paid on the 17th does not release in twelve equal slices. Day-weighted, or even — your call.
- Free toolNPV, IRR & XIRRIRR by bisection, so a sign-change-heavy series does not converge on a confident wrong answer.
- Lesson 9 · 12 minAdjusting entriesThree entries nobody sends an invoice for, made on the last day of the month, that turn a record of transactions into a set of accounts.
- State guides · cited in 19 statesFederal advisory for startupsThe federal levers a small company actually pulls: the R&D tax credit against payroll tax, QSBS for founders and investors, the 409A safe harbor for option pricing, and the entity choice that makes the rest available.
Want this handled without thinking about it?
Lopifi is building AI bookkeeping that keeps your books closed on US GAAP as transactions happen, watches deadlines like the ones above, and has a CPA review everything each quarter, for $200 a month. We’re not open yet.
More founder guides
- Vibe accountingCan you vibe code your startup’s accounting?AI coding tools build a finance dashboard in an afternoon, but not a closed, reconciled, GAAP-basis ledger. Where the line is, and how to stay inside it.
- The closeWhy startups should close their books every monthA monthly close turns a bank balance into numbers an investor, an auditor or a 409A firm will accept. What it is, and why it gets expensive to skip.
- FundraisingAudit-ready books before your Series AInvestors, lenders and auditors ask for the same things: accrual statements, reconciled accounts and support for every balance. How to be ready first.
- SAFEsHow to account for SAFEs on your balance sheetA SAFE is cash today and shares later. Why it usually sits with liabilities, how the cap and discount set conversion, and what to book at the priced round.
General information for US companies, not tax, legal or accounting advice for yours. Rules and thresholds change; confirm the specifics with a CPA before you act on them.