How to calculate burn rate and runway (the right way)
Gross burn, net burn, and runway — the three numbers every founder must know cold, with the formulas, the common mistakes, and what investors expect to hear when they ask.
Burn rate is the speed at which your company spends cash. Runway is how long you have before cash hits zero. Every founder should know both numbers without opening a spreadsheet — they're the financial equivalent of knowing the speed limit on the road you're driving.
This guide walks through the difference between gross and net burn, the exact formula investors expect, and the operational decisions that should change when runway drops below specific thresholds.
Gross burn vs net burn
Gross burn = total monthly cash out (salaries, software, rent, marketing — everything). It's the cost of staying alive with no revenue.
Net burn = gross burn − monthly cash in from customers. It's the actual hole in your bank account each month.
Investors care about both. Gross burn tells them the operating cost of the company. Net burn tells them how fast they're losing their money. Always report both — never just one.
Why trailing 3-month burn is the only number that matters
Single-month burn is too noisy — one big invoice or a delayed payment swings it wildly. Annualised burn (multiplying one month by 12) is too generous if last month happened to be light.
The investor-standard is trailing 3-month average burn: sum the net burn for the last three months and divide by three. Then divide current cash by that number to get runway in months. This is the calculation every board pack uses.
Step by step
- 01
Pull the last three months of cash movement
From your bank statements or accounting tool: monthly cash in, monthly cash out, and the closing cash balance. Don't use the P&L — accruals and timing differences will mislead you.
- 02
Calculate gross burn for each of the three months
Gross burn = total cash out (every dollar that left the account that month). Average the three numbers.
- 03
Calculate net burn for each of the three months
Net burn = cash out − cash in. If you had a one-off lumpy cash event (annual prepay from a customer), strip it out — net burn should reflect the normal operating rhythm.
- 04
Divide current cash by 3-month average net burn
Runway in months = cash on hand ÷ average net burn. If you have $600k in the bank and you're burning $50k/month net, you have 12 months of runway.
- 05
Add the round-trigger calendar
Most VCs want to close a round 4–6 months before runway ends. Subtract that buffer: with 12 months runway, you should be starting fundraising conversations now if you're not already.
- 06
Compute the 'default-alive' number
Paul Graham's framing: at your current growth rate and current cost trajectory, do you reach profitability before cash runs out? If yes, you're default-alive. If no, you're default-dead and need either more growth or less burn. Calculate this every month.
- 07
Set tripwires at 9, 6 and 3 months of runway
9 months: start having fundraising conversations and validate the round size. 6 months: be in active diligence with at least 3 funds. 3 months: have a signed term sheet OR a concrete cost-cut plan ready to execute. Never let runway drop below 3 months without a plan.
Key takeaways
- Report both gross and net burn. They answer different questions.
- Trailing 3-month average is the only burn number worth quoting.
- Runway = cash ÷ trailing 3-month net burn. Know it cold.
- Start fundraising at 9 months of runway, not 3. Hard money is raised when you don't need it.
- Default-alive vs default-dead is a more useful framing than 'how much runway do I have'.
Troubleshooting
Frequently asked questions
+What's a healthy burn multiple?
For venture-backed SaaS, the rule of thumb (Bessemer/David Sacks) is: burn multiple = net burn ÷ net new ARR. Under 1x is great, 1–2x is good, 2–3x is suspect, above 3x is concerning. Bootstrappers should aim for burn multiple under 0.5x.
+Should I include founder salaries in burn?
Yes. The moment you take a salary, it's part of burn. Investors expect to see realistic founder comp (typically $80–150k for early-stage US founders) in the model — sub-market salaries make the model look unrealistic and inflate the perceived 'efficiency'.
+How is burn different from EBITDA?
EBITDA is an accrual-accounting profitability measure. Burn is a cash measure. A company can have positive EBITDA and still be burning cash (because customers are paying late or capex is heavy), or negative EBITDA and not be burning cash (because of large prepaid contracts). Investors track both, but cash always wins.
+What if I don't have three months of history?
Use what you have and forecast forward conservatively. A two-month average with a forecasted third month is acceptable. Below two months, you don't really have a burn rate yet — you have a budget.
+When should I cut burn?
When two of the three are true: runway is under 9 months, growth is flat or declining, and the fundraising environment is hostile. Cutting at 12+ months runway with growing revenue almost always damages the business more than the cash it saves.
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