Burn rate and runway: how to calculate them from your own books
"How many months do we have?" is the question behind most founder decisions about hiring, pricing, and spending. The arithmetic is simple. Getting inputs you can trust is the hard part.
The three numbers
- Gross burn: total cash going out in a month, including payroll, contractors, software, hosting, and marketing.
- Net burn: cash going out minus cash coming in from customers. If more comes in than goes out, net burn is negative and you're cash-flow positive.
- Runway: cash balance ÷ average monthly net burn.
A worked example
| Month 1 | Month 2 | Month 3 | |
|---|---|---|---|
| Cash in from customers | $28,000 | $46,000 | $27,000 |
| Cash out | $44,000 | $45,000 | $43,000 |
| Net burn | $16,000 | −$1,000 | $16,000 |
Month 2 looks like the company became cash-flow positive. It didn't: a batch of annual renewals landed. Averaged over the quarter, net burn is about $10,300 a month. Removing the renewal effect and looking at the underlying trend, it's closer to $16,000.
With $190,000 in the bank:
- Using Month 2 alone: runway looks unlimited.
- Using the three-month average: about 18 months.
- Using the underlying trend: about 12 months.
Same company, very different answers. Twelve months is the figure to plan around.
Mistakes that make runway look longer than it is
- Treating annual prepayments as recurring cash. Cash from annual plans arrives once but funds a year of service. Your deferred revenue balance shows how much service you still owe for cash already spent or banked.
- Using a single month. One good or bad month distorts everything. Use a rolling three-month average, and look at the trend.
- Counting money that isn't cash yet. Funds waiting in Stripe, unpaid invoices, and expected tax refunds aren't in the bank. Count them separately, if at all.
- Mixing in financing. Loans and investment add to cash, but they aren't part of operating burn. Keep them out of the net burn calculation.
- Forgetting irregular costs. Annual software renewals, tax payments, and one-off legal or hiring costs belong in the forecast even if they didn't hit last quarter.
- Working from unreconciled books. If bank and payment accounts aren't reconciled, the cash figure itself may be wrong.
Burn and the accrual P&L tell different stories
Your accrual-based profit and loss shows whether the business model works: revenue earned against costs incurred. Burn shows whether you can keep the lights on while it does. A SaaS company can have improving margins and a shrinking runway at the same time, which is why both views matter (see cash vs accrual accounting).
Keeping it reliable
A trustworthy runway figure needs three things each month: reconciled bank and payment accounts, a consistent way of separating operating cash flow from financing, and a short note of any one-off items. With those in place, runway stops being a guess and becomes a number you can plan hiring and spending around.
This guide is general information about bookkeeping and SaaS metrics, not accounting, tax, or legal advice for your situation. Decisions about accounting policies, tax, and formal financial statements belong with your accountant or CPA.
ACCA Affiliate and founder of The SaaS Ledger, a bookkeeping practice for SaaS and subscription businesses. She works on the connection between subscription data, payment platforms, accounting records, and SaaS metrics.
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