Burn Rate vs Runway

Definition

Burn rate is the speed at which your company spends cash reserves before generating positive cash flow. Gross burn is total monthly spending; net burn is spending minus revenue. A startup with $50K/month expenses and $20K/month revenue has a $30K net burn rate and needs $30K from savings every month to survive. VCs use burn rate to calculate runway and assess financial discipline — a startup burning $200K/month with $10K MRR will be scrutinized much harder than one burning $200K with $150K MRR.

Common trap

The trap is tracking burn rate from your P&L instead of your bank account. Accrual accounting can show $50K net burn while your bank is actually losing $80K/month because of delayed client payments (accounts receivable), prepaid annual subscriptions expiring, and vendor invoices coming due simultaneously. Many founders have been shocked to discover their 'calculated' 12-month runway was actually 6 months when measured by actual cash in the bank.

Practical use

Calculate both metrics and track them separately: Gross Burn = Total Cash Out per Month. Net Burn = Cash Out − Cash In. Then compute Runway = Cash Balance ÷ Net Burn. Set alerts: if runway drops below 6 months, initiate cost cuts or fundraising immediately. Review burn rate weekly (not monthly) — cash surprises kill more startups than bad products.

Formula

Definition

Runway is the number of months your startup can continue operating before it runs out of cash, assuming no change in revenue or expenses. It is the countdown clock of your business. Runway = Cash in Bank ÷ Net Monthly Burn. If you have $600K and burn $50K/month net, you have 12 months of runway. VCs expect funded startups to have 18-24 months of runway; anything under 6 months is an emergency. 29% of startups fail because they run out of cash — not because the product failed, but because the clock ran out.

Common trap

The trap is calculating runway based on optimistic revenue projections. Founders say 'We have 12 months of runway, but revenue should grow 20%/month so we'll be fine.' Revenue projections miss targets 70% of the time. Always calculate runway assuming ZERO revenue growth — this is your 'default alive' calculation. If you can't survive on current revenue, you're 'default dead' and need to either raise money or cut costs immediately. Also, runway shrinks faster than expected because expenses creep up — tool subscriptions, infrastructure scaling, salary increases.

Practical use

Calculate three versions of runway and review weekly: (1) Worst Case: Cash ÷ Net Burn (no revenue growth). (2) Base Case: Cash ÷ (Net Burn − Expected Monthly Revenue Increase). (3) Best Case: Cash ÷ (Net Burn − Aggressive Revenue). Manage to the Worst Case so you're never surprised. Set hard alerts: at 9 months, begin fundraising prep. At 6 months, start fundraising. At 3 months, emergency cuts.

Formula