Burn Rate and Runway: How to Calculate Them and Buy More Time
Runway is the number of months your startup can survive before the money runs out. Every big decision, from hiring to fundraising, depends on knowing it precisely. Here is how to calculate burn and runway correctly and how to extend both.
Key takeaways
- Gross burn is what you spend each month. Net burn is what you spend minus what you earn.
- Runway equals cash in the bank divided by net burn, measured in months.
- Use a three-month average burn and a forward-looking forecast, not last month's number alone.
- Start fundraising while you still have at least six to nine months of runway left.
Running out of cash is the most direct way a startup dies. In CB Insights' analysis of startup post-mortems, running out of money or failing to raise new capital was one of the most frequently cited reasons for shutting down. Yet many founders cannot say, without opening a spreadsheet, how many months they have left.
This explainer covers the three numbers every founder should know by heart, a worked example and the levers you can pull when the answer is uncomfortable.
Gross burn, net burn and runway explained
These three terms are often mixed up, and the confusion can make runway look months longer than it is.
| Metric | Formula | What it tells you |
|---|---|---|
| Gross burn | Total monthly operating expenses | How expensive your company is to run |
| Net burn | Cash going out minus cash coming in, per month | How fast your bank balance is actually shrinking |
| Runway | Cash balance divided by net burn | How many months you can operate before cash hits zero |
Gross burn matters because revenue can disappear. If your biggest customer churns, you fall back toward your gross burn quickly. Net burn matters because it drives runway today.
How to calculate your runway: a worked example
Imagine a small software startup with the following numbers:
- Cash in the bank: $600,000
- Monthly expenses (salaries, tools, rent, marketing): $80,000
- Monthly revenue collected: $30,000
- Find gross burn: total monthly expenses are $80,000.
- Find net burn: $80,000 spent minus $30,000 collected equals $50,000 per month.
- Divide cash by net burn: $600,000 divided by $50,000 equals 12 months of runway.
- Stress-test it: if revenue dropped to zero, runway would be $600,000 divided by $80,000, or 7.5 months. That is your worst case.
Common mistake
Using revenue you have invoiced instead of cash you have collected. If customers pay on 60-day terms, booked revenue can make net burn look far lower than the cash actually leaving your account. Runway is about cash, so count cash.
Use averages and forecasts, not one month
Monthly spending is lumpy. Annual software renewals, tax payments and one-off legal fees can make a single month misleading. Use the average net burn of the last three months as your baseline.
Then look ahead. If you plan to hire three engineers next quarter, your burn will rise, and your runway will shrink faster than today's number suggests. A simple month-by-month forecast that includes planned hires is far more useful than a single division.
Default alive or default dead?
Y Combinator co-founder Paul Graham suggested a sharper question than "how much runway do we have?" Ask instead: assuming expenses stay flat and revenue keeps growing at its recent rate, will the company reach profitability before the cash runs out?
If the answer is yes, the company is "default alive." If not, it is "default dead," and it depends on raising more money, which is never guaranteed. Knowing which one you are changes how you should plan the next six months.
When to start fundraising
Raising a round usually takes longer than founders expect. Preparing materials, meeting investors, negotiating terms and closing legal work can easily take three to six months. That leads to a practical rule:
- Start preparing when you have about nine to twelve months of runway.
- Be actively raising by the time you have six to nine months left.
- Below six months, investors can sense urgency, which weakens your negotiating position. Have a cost-cutting plan ready in case the round takes longer.
A useful efficiency check for growing software companies is the burn multiple, popularized by investor David Sacks: net burn divided by net new annual recurring revenue in the same period. A burn multiple below 1 means you add more recurring revenue than you burn, which investors see as very efficient. A number above 2 suggests you are spending heavily for each dollar of growth.
7 ways to extend your runway
When runway is shorter than you would like, combine moves that cut costs with moves that bring cash in sooner.
- Review every subscription. Cancel unused software seats and downgrade plans you have outgrown. It is rarely the biggest saving, but it is the fastest.
- Pause or slow hiring. Salaries are usually the largest cost. Delaying a planned hire by one quarter can add weeks of runway.
- Collect cash faster. Offer a small discount for annual prepayment, shorten payment terms and follow up on overdue invoices every week.
- Cut marketing that does not pay back. Keep channels with a clear payback period and pause experiments without results.
- Renegotiate big contracts. Office leases, cloud bills and agency retainers often have room to move, especially if you commit to a longer term.
- Raise prices for new customers. Early-stage startups often underprice. A modest increase can improve net burn without adding any cost.
- Look at non-dilutive funding. Grants, revenue-based financing and government innovation programs can add cash without giving up equity.
Pro tip
If you must cut costs, cut once and cut enough. Repeated small cuts damage team morale more than one clear, well-explained decision that gives the company a realistic path forward.
Your action plan
- Calculate gross burn, net burn and runway from the last three months of bank data
- Build a 12-month forecast that includes planned hires and big annual payments
- Decide whether you are default alive or default dead at today's growth rate
- Set the date when you will start fundraising, based on runway, not on mood
- Share the runway number with your co-founders and update it on the same day every month
Frequently asked questions
What is a good burn rate for a startup?
There is no universal number. A good burn rate is one that gives you enough runway to reach your next milestone, such as a funding round or profitability, with a buffer of several months. Compare burn to growth, not to other companies.
Should runway include money from a round that has not closed?
No. Count only cash that is in your bank account. Term sheets can fall through, and planning around money you do not have yet is a common way to run out of cash.
How often should I recalculate runway?
At least once a month, after you close your books. Recalculate immediately after any big change, such as losing a major customer, signing a large contract or adding several hires.
Is a profitable startup still burning cash?
It can be. A company can be profitable on paper but still have negative cash flow if customers pay slowly or if it buys inventory or equipment up front. That is why runway uses cash, not profit.
Related reading
The bottom line
Runway is the clock every startup runs on. Calculate it from real cash, forecast it with your planned spending, and start fundraising well before it feels urgent. Founders who know their runway at all times make calmer decisions, and calm decisions are usually better ones.
