How to Calculate Runway Without Getting the Burn Wrong

Runway is the number a founder lives by, and it is one of the easiest numbers to get wrong. Most founders can quote their runway in seconds. Far fewer can say which burn figure they divided by, and that single choice can move the answer by more than a year. To calculate runway in a way you can trust, start with the right definition of burn, not the one that is easiest to reach for.

Runway is cash divided by burn. The trap is which burn.

The formula is simple. Runway is cash divided by burn. The trap is that there are two burn numbers, gross and net, and they can produce runway figures that differ by over a year for the same company with the same cash. The arithmetic looks correct either way, which is why the mistake survives every spot check.

Take a company with $750,000 in the bank. It spends $75,000 a month on everything: payroll, rent, software, contractors. It also brings in $45,000 a month in subscription revenue. Divide cash by gross burn, the full $75,000, and you get 10 months of runway. Divide by net burn, the $30,000 it actually loses each month after revenue, and you get 25 months. Same business, a 15-month swing produced entirely by which figure you chose.

Gross burn versus net burn

Gross burn is every dollar leaving the business, with no offset for revenue. Net burn subtracts revenue, so it reflects the cash you actually lose. For a pre-revenue company the two are identical. For a company with real subscription revenue they diverge sharply, and net burn is the number that should drive runway, because runway is about how long real cash lasts.

There is a subtler trap: treating one unusual month as typical. An annual software renewal or a delayed invoice will distort the figure in either direction. A trailing three-month average net burn smooths out the one-offs and shows how the business is actually running.

The gap between the two is a signal

Once you track both, the gap tells you how much of your spending revenue already covers. Two companies can each have $500,000 of gross burn. If the first has net burn of $100,000, revenue covers 80 percent of costs. If the second has net burn of $450,000, it covers almost nothing. On cash alone they look similar. On the gap they are completely different businesses. A net burn shrinking as a share of gross burn, month over month, is one of the most encouraging trends a founder can show.

Four steps to a number you can trust

The fix is not a more elaborate spreadsheet. It is removing the manual points where errors creep in. Raymond Panko's research at the University of Hawaii found that, on average, 88 percent of spreadsheets contain errors in 1 percent or more of their formula cells, and a runway model is exactly where one broken cell does the most damage.

1. Reconcile the cash balance to the bank, so the numerator is real.

2. Average net burn over a trailing three months from reconciled actuals.

3. Divide cash by that net burn to get runway in months.

4. Model one scenario forward, since trailing burn alone overstates a company about to add headcount.

When cash and burn flow from books that are already reconciled and closed on a regular cadence, the biggest sources of error are gone before the calculation runs. The spreadsheet becomes a presentation layer on top of numbers that were already correct. That is the difference between a runway number you hope is right and one you know is.

Clean books. Clear decisions.

Vizhen is a bookkeeping and finance operations firm for growing Canadian and American businesses. We help founders get clean books, fast answers, and the clarity to make better decisions. Book a 15-minute Fit Check at vizhenbooks.com.