Gross burn, net burn, and why the difference decides everything
Two numbers get called burn rate, and confusing them is how founders end up surprised. Gross burn is every dollar that leaves your bank account in a month: payroll and the employer taxes on it, rent, hosting, software subscriptions, contractors, advertising, and the cash portion of cost of goods. Net burn is gross burn minus the cash you actually collected that month. Net burn is what shrinks your balance, so net burn is what divides into your cash to give runway.
Gross burn still matters, for two reasons. It is the number that tells you how large the machine is, and therefore how much you could cut in an emergency; a company with $320,000 of gross burn and $95,000 of collections has $320,000 of levers to pull, not $225,000. And it is the number that does not lie to you when collections are lumpy. A single large annual prepayment can make one month's net burn look excellent while nothing structural has changed.
Note the word cash throughout. Runway is a bank-account question, not an accounting one. Invoiced revenue you have not been paid for does not extend runway; a customer who prepays twelve months does, immediately, even though revenue recognition spreads it over the year. If you bill annually up front, your cash position leads your income statement, and your working capital movements can swamp your operating loss. Use the bank statement.
The formula, and what breaks when burn is not constant
The base calculation is a division: cash on hand divided by net monthly burn. Its honesty depends entirely on one assumption — that next month looks like this month. That assumption is almost never true, and it fails in both directions.
If you are hiring, expenses compound. A team adding one person a month to a headcount of thirty grows payroll by roughly three percent monthly, and payroll is usually most of gross burn. Under compounding burn the runway is no longer a simple quotient: cumulative spend over N months follows a geometric series, so cash lasts until B₀ · ((1+g)N − 1) / g equals your balance. At 10% monthly burn growth, $1,000,000 of cash against a starting burn of $100,000 lasts 7.26 months, not 10 — you lose more than a quarter of your runway to compounding alone.
If revenue is growing faster than expenses, the effect runs the other way and the flat calculation understates you. This calculator therefore runs both: a constant-burn runway you can check by hand, and a month-by-month simulation in which expenses and collections each compound at rates you set. Where the two diverge, the divergence is the size of the assumption you were making implicitly.
The simulation also answers a question the quotient cannot: whether you hold enough cash to reach the month collections overtake expenses. That month is where the two compounding curves cross, and the deepest point of your cash drawdown happens shortly before it. Comparing that drawdown to your balance is the difference between a plan that funds itself and a plan that requires another round. The crossing can also run the other way: if you collect more than you spend today but your expenses compound faster than your collections, expenses overtake collections in a later month instead. That is a lapsing surplus rather than a breakeven, so the calculator names the month it reverses and withholds the breakeven and peak-cash figures.
Worked example: $3.6M of cash, $320k out, $95k in
Take a company holding $3,600,000, spending $320,000 a month in cash, collecting $95,000 a month, with expenses set to grow 2% a month and collections 6%.
- Gross burn. $320,000 — that is the whole outflow.
- Net burn. $320,000 − $95,000 = $225,000 a month.
- Flat runway. $3,600,000 ÷ $225,000 = 16.0 months exactly. This is the figure you can verify on paper.
- Month 1 with growth. Expenses $320,000, collections $95,000, net burn $225,000, ending cash $3,375,000.
- Month 2. Expenses $320,000 × 1.02 = $326,400. Collections $95,000 × 1.06 = $100,700. Net burn $225,700, ending cash $3,149,300.
- Month 3. Expenses $326,400 × 1.02 = $332,928. Collections $100,700 × 1.06 = $106,742. Net burn $226,186, ending cash $2,923,114.
- Run it out. Net burn peaks near $226,500 around month five and then falls as collections compound faster than expenses. The balance crosses zero part-way through month 17, giving 16.4 months of runway — slightly better than the flat figure, because 6% revenue growth beats 2% expense growth.
Now the harder question. Collections overtake expenses when $95,000 × 1.06t−1 first exceeds $320,000 × 1.02t−1. Dividing, that needs (1.06 ÷ 1.02)t−1 ≥ 320 ÷ 95 = 3.3684, and since 1.06 ÷ 1.02 = 1.039216, you need t − 1 = 32 — so breakeven arrives in month 33. Summing net burn to that point, the deepest cash drawdown is $5,518,121. Against $3,600,000 on hand, this plan is $1,918,121 short of funding itself to breakeven. Sixteen months of runway looks comfortable; the same plan cannot reach profitability on the cash it holds.
How much runway you should be carrying
Work backwards from how long raising money takes. A priced institutional round runs from first partner meeting through diligence, term sheet, legal drafting and close over a period measured in months, and it consumes the founder time that would otherwise be spent hitting the numbers the round is priced on. The widely used planning convention among venture-backed operators is to start raising with eighteen months of runway and to treat twelve as the point at which the raise becomes urgent, because a company visibly running out of cash negotiates from a weak position. Those are conventions, not measured thresholds — but the logic behind them is sound, and it is why this calculator flags anything under twelve months and treats under six as critical.
Read the last few months of any runway figure as unusable. If your balance hits zero in month 17, your real decision deadline is somewhere around month 10, because payroll cannot be paid with a signed term sheet. Runway is a countdown to a decision, not to insolvency.
There is a formal reason to care about the twelve-month mark specifically. Under FASB Accounting Standards Codification 205-40, management must evaluate whether conditions raise substantial doubt about the entity's ability to continue as a going concern within one year after the date the financial statements are issued, and disclose that evaluation. If your runway is inside that window when you close your books, the going-concern question is on the table for your auditors, and a going-concern paragraph in an audit opinion is visible to every investor, lender and enterprise customer doing procurement diligence.
Finally, judge the burn against what it is buying, not just against the calendar. Net burn divided by net new ARR added in the same period — the burn multiple — tells you the cash price of a dollar of new recurring revenue, and it is far more diagnostic than the burn figure alone. Pair it with your Rule of 40 score and your CAC payback period.
How burn growth eats runway
| Monthly burn growth | Runway (months) | Months lost vs flat | Burn in the final month |
|---|---|---|---|
| 0% | 10.00 | — | $100,000 |
| 2% | 9.21 | 0.79 | $119,509 |
| 5% | 8.31 | 1.69 | $147,746 |
| 10% | 7.26 | 2.74 | $194,872 |
| 15% | 6.54 | 3.46 | $231,306 |
| 20% | 6.02 | 3.98 | $298,598 |
Final-month burn is $100,000 × (1+g) raised to the number of whole months completed. At 10% growth the last month costs $194,872 against $100,000 in the first, which is why runway falls so much faster than the growth rate itself suggests.
What belongs in gross burn — and what does not
Include: gross payroll plus employer taxes and benefits, contractor payments, rent and utilities, software and hosting, advertising spend, the cash portion of cost of goods sold, professional fees, and cash interest on any debt. Include capital purchases in the month you pay for them; runway is a cash question, so a $200,000 server order hits the month the wire goes out, not over five years of depreciation.
Exclude: depreciation and amortisation, stock-based compensation, accrued-but-unpaid bonuses, and anything else that appears on the income statement without moving money. Exclude financing flows too — a funding tranche is not negative burn, it is new cash. Enter it in the committed-funding field so it lengthens the runway without distorting the burn figure.
Mistakes that make runway look longer than it is
- Using invoiced revenue instead of collections. Revenue you have booked but not banked pays no salaries. If your average collection period is 45 days, your cash lags your income statement by a month and a half.
- Counting undrawn credit or unsigned term sheets as cash. Only include money you control or a tranche that is contractually committed.
- Assuming flat burn while hiring. Every accepted offer raises next month's baseline, and the loaded cost of an employee is materially above their salary once payroll taxes and benefits are added.
- Averaging across an annual-billing spike. If January collects a year of renewals, January's net burn is meaningless. Use a trailing three-month average, or model collections explicitly.
- Forgetting annual and quarterly outflows. Insurance premiums, audit fees, tax payments, conference sponsorships and SaaS contracts that renew yearly do not show up in a typical month but are real.
- Ignoring the raise timeline. Runway to zero is not runway to a decision. Subtract the months a financing process actually takes.
- Netting a one-off receipt into the burn rate. A grant, a tax refund or a legal settlement improves the balance once; it does not lower the burn.
Related measures and when to use them instead
Runway answers how long. Three other measures answer how well, and a board will ask all four.
Burn multiple divides net cash burned in a period by net new ARR added in the same period. It prices growth directly in cash and is immune to the accounting choices that move margins. Compute net new ARR with the MRR calculator and divide your net burn for the same months into it.
Rule of 40 adds revenue growth to profit margin and tests the sum against forty; it is the standard shorthand for whether the burn is justified by the growth. CAC payback answers how many months of gross profit a new customer takes to repay its acquisition cost — a company with long payback burns cash structurally, no matter how good the runway looks today.
For the revenue side of the same plan, project collections forward with the subscription revenue forecast calculator, and if you are testing whether a cost base can be covered at all, the break-even point calculator answers the fixed-versus-variable version of the same question. Where a decision hinges on the timing of cash rather than its total, a thirteen-week rolling cash forecast built from actual invoice due dates beats any monthly model, including this one.
Key terms
- Gross burn
- Total cash operating outflows in a month, before any offset for revenue. The measure of how large your cost base is.
- Net burn
- Gross burn less cash collected in the month. The rate at which the bank balance actually falls, and the correct denominator for runway.
- Runway
- The number of months until cash reaches zero at the modelled burn. Not the same as the time until you must decide to raise or cut.
- Cash-flow breakeven
- The first month in which collections cover cash outflows. Distinct from accounting breakeven, which ignores timing and includes non-cash charges.
- Burn multiple
- Net cash burned divided by net new ARR added in the same period. The cash price of a dollar of new recurring revenue.
- Going concern (ASC 205-40)
- The FASB requirement that management evaluate and disclose substantial doubt about the entity's ability to operate for one year after the financial statements are issued.