Burn Rate and Runway: Working Them Out From Your Books

How do we work out burn rate and runway from our books?

Gross burn is the cash a business pays out on operations in a month. Net burn is that amount minus the cash it takes in from customers. Runway is reconciled cash on hand (the cash in the books after it is matched to the bank statement) divided by net burn, in months. It tells you how long the cash lasts at the current pace. Investors, a lender or a board will check the burn figure against the bank statement, so a figure that does not tie to reconciled cash is the one to fix before a raise or a board meeting. These are management measures, not terms defined in the tax code or in accounting standards, so write down how you calculate them and keep the method the same every month.

If cash received is at least cash paid out, there is no net burn and no runway to calculate.

Net burn is a cash figure, so it comes from the cash flow statement, not from profit. That statement reports the money going in and out over a period, and it is related to, but not the same as, net income (SEC: Beginners' Guide to Financial Statements).

A case is not simple when money was raised or borrowed in the period, customers prepay annual plans, bills or invoices are open at month-end, the books are on the cash method, or the cash balance in the books was never reconciled to the bank. Each pulls burn away from the loss or the bank balance; the first Example shows a loss that suggests 14 months of runway when the cash supports 12. The sections below take them in turn.

If the gap between your burn and the fall in the bank balance is still unexplained after those timing items, if the books cannot be reconciled to the bank, or if a raise or board meeting needs a cash figure you must defend, that is the point to have the books reviewed by a professional.

Gather the bank and card statements for every account, payment-processor payout reports, the reconciled cash balance, a list of unpaid bills and unpaid customer invoices by age, the debt schedule, a list of this year's raises, and any investor or loan agreement that defines cash or burn.

Which lines of the books give net burn: the cash flow statement or the income statement?

Net burn is the net cash used in operating activities on the cash flow statement. That statement has three parts: operating activities, investing activities (buying or selling long-term assets such as equipment) and financing activities (raising money, borrowing and repaying). Most statements use the indirect method: the operating part starts from net income and adjusts for non-cash items and for cash used or provided by other operating assets and liabilities (SEC). Under that method the income statement's net loss is the starting line, not the answer.

To work it out each month:

1. Reconcile every bank and card account for the month (see the section on the bank balance below).
2. Read net cash used in operating activities. If the books produce no cash flow statement, or its bottom line does not equal the change in reconciled cash, rebuild it from the reconciled bank lines, sorting each line as operating, investing or financing. Ignore transfers between your own accounts, and count a card bill when it is paid, not each card charge as well. An unpaid card balance is a bill already incurred, so show it beside payables.
3. Decide whether equipment purchases count, and write the choice down.
4. Average a stated window of months. One month swings with timing; a window that holds an annual renewal evens it out.
5. Divide reconciled cash by that average.

Some board packages show burn from the income statement instead: costs less revenue as booked, leaving out non-cash costs and adding cash spent on equipment, as in monthly financials for investors and the board. That figure equals cash burn only when no receivable, payable, prepaid cost, deferred revenue or other operating balance moved and equipment is counted the same way. Label which measure a runway figure uses, and reconcile the two before comparing them.

Why does burn from the income statement differ from how much the bank balance fell?

The income statement records revenue when earned and cost when incurred (the accrual basis). The bank balance records every dollar that moved, including money raised, loans and equipment. Books on the cash basis record income and cost when money moves instead. The IRS describes the same two methods for tax returns (Publication 538), and a company can keep its books on a different basis from its return. Five things separate the loss from the fall in the bank balance:

The cash flow statement is the schedule that lists these items between the loss and the change in cash. The next sections take the bank balance, financing and timing in order.

Why does the cash balance in the books not match the bank balance?

The books and the bank record the same money at different moments, or one of them holds an error. The IRS names three causes of a gap: the statement includes bank charges not yet entered in the books, it does not include deposits made after the statement date, and it does not include checks that had not cleared by the statement date (Publication 583).

A reconciliation clears the gap. Add deposits not yet on the statement, subtract outstanding checks, enter what the books lack (such as service charges) and correct what was recorded wrongly. The adjusted statement balance should then equal the adjusted book balance, and if it does not, an error remains to be found (Publication 583).

Count all of the company's cash: every bank account, and payout balances a card processor still holds that are due to be paid out. Leave out money that is not the company's to spend, such as sales tax collected and not yet remitted or customer funds held for others, or show it on its own line beside runway. Use the reconciled balance of every account as the cash in the runway formula. An unexplained difference means the cash figure is not yet reliable, and runway built on it is not either. A connected bank feed is not a reconciliation; see bank feeds are not reconciliation. If the books are months behind, see cleaning up your books before fundraising.

Which cash movements should stay out of burn: a raise, SAFE money, loan proceeds, loan repayments, owner payouts?

Raises, SAFE or convertible note money, loan proceeds and loan repayments all stay out of net burn. They are financing (money from owners, investors and lenders, not money earned from customers), not operations: the SEC places cash raised by selling stock or bonds or by borrowing from banks, and the repayment of a bank loan, in financing activities, separate from operating activities (SEC). SAFEs, notes and owner funds are usually treated the same way; how they are booked is a judgment covered in cleaning up your books before fundraising and recording a priced round.

A raise changes the cash in the numerator of runway, not the burn in the denominator. A scheduled loan repayment or owner payout is outside burn but still uses cash, so list it beside the burn figure and say whether runway is before or after it. Pay for work, such as a founder's salary or a partner's guaranteed payment, is an operating cost and stays in burn; a payout of profit or capital is not.

Counting raise money as if it reduced burn makes runway look longer than it is.

How do prepaid annual plans, unpaid bills and unpaid invoices move cash away from profit?

Prepaid annual plans, unpaid bills and unpaid invoices are timing gaps: the income statement books the item in one month, and the cash moves in another. The gap reverses later, but the month in between misstates the pace.

Smooth the swings by averaging over a window long enough to hold the lump, or by forecasting cash month by month so each known payment lands in the month it will be paid. Unpaid bills are cash already spoken for, so show payables aging beside the cash balance. An invoice sent before the work is done is not revenue yet; see the deferred revenue guide linked below.

In cash-basis books, income and cost are recorded when money moves, so the income statement shows no unpaid invoice and no unpaid bill. The loss then sits closer to cash on those two items, but other differences remain (equipment, loan repayments), and bills still waiting to be paid will use cash, and reach the income statement only when paid, so include them in the cash forecast. Booking prepaid plans is covered in deferred revenue for SaaS subscriptions, and cash versus accrual books for investors in switching from cash to accrual accounting. A profitable business with an empty account is covered in profitable but no cash.

How do tax items change cash burn?

The payroll tax offset for research changes cash burn directly. Income tax deduction rules (Section 174A) change the tax return, not the salaries and vendor payments in operating cash; they can change the income tax a profitable company pays, which is operating cash when paid (Form 6765 instructions).

A qualified small business can elect to apply up to $500,000 of its research credit a year against its employer payroll tax. The election is made by the due date, extensions included, of the originally filed income tax return (by the entity itself for a partnership or S corporation), and not for more than five years (Form 6765 instructions). Who qualifies and how to elect are in the research credit against payroll tax. The offset arrives late:

• The credit is claimed on the employment tax return for the first quarter that begins after the income tax return with the election is filed, with Form 8974 attached (Form 8974 instructions). For a calendar-year company that files on March 17, the second quarter is the first it can claim. An employer that files Form 943 or 944 claims it on the return for the year that includes that quarter.
• Each quarter, the credit first reduces the employer's share of social security tax up to $250,000, then the employer's share of Medicare tax; any unused amount carries to the next quarter.

So the offset is not cash in the period the research is done. Count it in a forecast only from the first quarter it can be claimed, and only up to the payroll tax actually owed.

How many months ahead should runway look, and what does the one-year going-concern test have to do with it?

No source used for this page sets a number of months of runway to hold; that is a judgment for management and the board. One official yardstick exists for the look-ahead: the going-concern standard for financial statements prepared under US GAAP. For each annual and interim set of statements, management evaluates whether conditions raise substantial doubt about the company's ability to meet its obligations as they come due within one year after the statements are issued, or are available to be issued when applicable (complete in GAAP form with every approval for issuance obtained) (FASB ASU 2014-15). The standard applies to all entities that prepare such statements.

Reading a runway figure against that look-ahead:

• The evaluation looks at obligations due within one year after the statements are issued (or available to be issued), so a month-by-month cash forecast through that date is the usual way to see them, with known lumps such as annual renewals, loan payments and the first quarter of a payroll tax offset in the month they land.
• Runway under twelve months is a condition management weighs; by itself it neither proves nor rules out substantial doubt. The standard asks whether it is probable the company cannot meet its obligations in that year, weighing its liquidity, obligations due and the funds needed to operate.
• A raise or loan not yet closed is left out of the first look. It counts afterwards only if it is probable the plan will be carried out within the year and probable it will relieve the doubt, which generally requires management to have approved the plan before the statements are issued.
• Whether or not plans relieve the doubt, the notes must describe the conditions and the plans; if doubt is not relieved, they must also say so plainly.

Runway is a planning figure; the going-concern evaluation is a reporting step with its own judgments. If an investor agreement or loan covenant defines cash, burn or a minimum cash balance, use that definition for that purpose and keep your own method for planning. Whether your statements must be prepared under US GAAP at all is a separate question; see audited financials for investors.

Example

These examples are illustrative and use US dollars.

Net burn is higher than the loss

A startup ends the month with $1,200,000 of reconciled cash. Its income statement shows an $85,000 loss with no non-cash costs, yet cash fell $100,000. It collected $5,000 of older invoices, which added cash, and paid $20,000 of last month's bills, which used cash. Net burn is $85,000 - $5,000 + $20,000 = $100,000. Runway is 12 months ($1,200,000 ÷ $100,000), not the 14 months the loss suggests.

A raise closes

A company starts the month with $1,000,000 of cash and uses $200,000 in operations. A $4,000,000 raise closes on the 28th. The bank balance rises $3,800,000 to $4,800,000, but net burn is still $200,000 because the raise is financing. Runway was 4 months before the raise ($800,000 ÷ $200,000) and is 24 months after it ($4,800,000 ÷ $200,000). Reading burn from the bank balance would show cash rising, not burning.

The books and the bank differ

The books show $398,000 of cash and the bank shows $412,000. The company wrote checks totaling $14,000 that have not cleared, so the adjusted bank balance is $398,000 and the two agree. The cash to use is $398,000. At a net burn of $20,000, runway is 19.9 months; the bank figure would read 20.6. Had only $12,000 of checks been found, $2,000 would remain unexplained, the reconciliation would not be finished, and the cash figure would not yet be ready to divide.

Different for you?

• The burn in your model and the fall in your bank balance disagree, or the cash balance in your books is unreconciled: start with bank feeds are not reconciliation, and if the difference stays unexplained, bring your bank statements and ledger to startup accounting help.
• A raise or your first board meeting needs financials you can defend: see monthly financials for investors and the board; if the figures must hold up with investors, bring them to startup accounting help.
• Your books are behind, kept in a spreadsheet or never reconciled to the bank: see cleaning up your books before fundraising and get catch-up bookkeeping help.
• Customers prepay annual or multi-year plans: see deferred revenue for SaaS subscriptions.
• Your accounts do not separate payroll, hosting and research costs the way investors read them: see chart of accounts for a startup.
• You plan to use the research credit against payroll tax: see the research credit against payroll tax and get startup tax help.
• Your books are on the cash method but investors want accrual: see switching from cash to accrual accounting.
• An auditor or lender raises going concern, or runway is under a year with no closed financing: the evaluation is a judgment for management and the auditor, so bring your cash forecast to startup accounting help; for audits in general see audited financials for investors.