Every company that fails for "financial reasons" fails the same way: it runs out of cash. Not out of customers, not out of ideas, not out of a clever plan for next year, out of money in the bank to make payroll on Friday. Burn rate is how fast you are emptying the tank, and runway is how many months you have left at that speed. They are the two numbers a leader should be able to recite without opening a spreadsheet, and most can't.

The quick version

  • Burn rate is how much cash you spend in a month. Gross burn is everything that goes out the door; net burn subtracts the cash that comes in, so it is what your bank balance actually loses each month.
  • Runway is how long that lasts: cash in the bank ÷ monthly net burn = months until empty. Twelve months of runway means twelve payrolls before you must raise, earn, or cut.
  • Efficiency matters as much as speed. The burn multiple asks how much cash you burn to add a dollar of new recurring revenue, spending fast to grow fast can be fine; spending fast and growing slowly is the warning sign.
  • The trap is not knowing. Paul Graham found that half the founders he spoke to couldn't say whether they were on track to survive on the money they had, and that ignorance, not the burn itself, is what kills.

The idea in depth

Start with the plumbing, because the words get used loosely. Gross burn is your total monthly cash outflow, salaries, rent, software, marketing, everything. Net burn subtracts the cash actually collected that month, so it is the real drain on your balance: net burn = monthly cash out − monthly cash in. A company spending £100k a month and collecting £40k has a gross burn of £100k but a net burn of £60k, and it is the £60k that empties the account. These definitions are the working standard across startup-finance explainers from Carta and Mercury and corporate-finance references like Wall Street Prep, useful precisely because they agree.

So the move is to track net burn on a cash basis, not your P&L. Your profit-and-loss statement runs on accruals, it books revenue when earned and costs when incurred, not when money moves, so a "profitable" month can still drain the bank if customers pay late and suppliers are paid early. Pull the actual bank-balance change, month over month. If you want to understand why the two diverge, that is the gap between management and financial accounting, and why the cash flow statement exists as a separate document at all.

Runway: the one-line formula that should never surprise you

Runway is almost embarrassingly simple to compute and almost universally under-watched: runway (months) = cash in the bank ÷ monthly net burn. £600k in the bank, burning £60k net a month, gives you ten months. The arithmetic isn't the hard part, the discipline of recalculating it every month, and of believing the answer, is.

flowchart LR
  A(["Cash out this month
(gross burn)"]) --> C(["Net burn
= out − in"])
  B(["Cash in this month
(revenue collected)"]) --> C
  D(["Cash in the bank"]) --> E(["Runway
= cash ÷ net burn"])
  C --> E
The whole model on one line: net burn empties the account, and runway is how many months that takes. Leaders Loop

The reason runway deserves obsessive attention is timing, not just survival. Fundraising is slow, the working rule of thumb across venture practitioners is that it takes roughly six months to close a round, which is why the common advice is to raise enough for 18 to 24 months and to open the next conversation while you still have nine-plus months of cash left (guidance laid out plainly in NYU's "Runway Equation"). Walk into a Series A with six months of runway and you are negotiating from desperation; investors can smell it, and the terms reflect it.

Andreessen Horowitz partner Scott Kupor makes the same point from the other side of the table in Secrets of Sand Hill Road (2019): a startup's job between rounds is to convert cash into milestones that justify the next, higher valuation, which takes a year-plus of uninterrupted execution. Runway, then, isn't a survival number, it is an execution number. It tells you how much building time you have bought before the clock forces a decision.

Runway is not how long you survive, it is how long you get to keep your hands on the wheel.

Burn alone is meaningless, measure efficiency too

Here is where naive cash-watching goes wrong. A high burn rate is not automatically bad: a company burning fast to capture a winner-take-all market may be making the right bet, while a company burning slowly in a dying one is just dying quietly. Burn only means something against what it buys. The cleanest framing comes from Craft Ventures' David Sacks, who popularised the burn multiple in his 2020 essay "The Burn Multiple": burn multiple = net burn ÷ net new ARR, how many dollars of cash you torch to add one dollar of new annual recurring revenue.

Sacks's rough scorecard for a venture-stage company: under 1.5x is excellent, around 2x is reasonable for an early-stage business, and a multiple climbing past 3x is a flashing light that you are buying growth far too expensively. The metric should fall as you mature, trending toward zero as you approach break-even. The practical habit is to put a number on efficiency, not just on spend: if net burn rose this quarter, ask whether net new revenue rose faster. If it didn't, you have a leak dressed up as investment.

flowchart TD
  A(["Burn rose this quarter"]) --> B{"Did net new revenue
rise faster?"}
  B -->|Yes| C(["Efficient growth,
burn multiple improving"])
  B -->|No| D(["Leak dressed as investment,
cut or fix the engine"])
The question that turns a burn number into a decision. Leaders Loop

An honest limitation. The burn multiple was built for venture-backed software businesses with clean recurring revenue, and it flatters or punishes unfairly outside that world. A consultancy, a hardware maker, or a marketplace with lumpy, non-recurring revenue can't read it the same way, "net new ARR" barely applies. And like any ratio, it can be gamed in the short run by starving the very investments (sales hires, R&D) that would have driven next year's growth. Treat it as one gauge on the dashboard, alongside gross margin and runway, not the single verdict.

Default alive or default dead

The most useful reframe in this whole area isn't a formula, it's a question. In his October 2015 essay "Default Alive or Default Dead?", Y Combinator's Paul Graham asks founders one thing: "Assuming their expenses remain constant and their revenue growth is what it has been over the last several months, do they make it to profitability on the money they have left?" If yes, you are default alive; if no, default dead, and the unsettling finding was that "half the founders I talk to don't know" which they are. Not because the data is hard to get, but because they never habitually ask.

Make that question a standing item, then, in every board pack, every monthly review. Plot your projected cash balance forward at current burn and current growth, and see whether the line bends back above zero before it runs out, or crosses zero first. If you're default dead, Graham's point is that you have far more options the earlier you notice: grow faster, or cut, while you still have runway to do either calmly rather than in a panic.

A worked example

Illustrative figures, invented to show the mechanics, not real company data.

Northwind, a small B2B software firm, has £1.2m in the bank. Last month it spent £180k (salaries, cloud, office, marketing) and collected £90k from customers. So gross burn is £180k, net burn is £90k, and runway is £1.2m ÷ £90k ≈ 13 months. Comfortable, on the surface.

Now look at efficiency. Over the last quarter Northwind's net burn averaged £90k a month (£270k for the quarter) and it added £60k of net new ARR. Its burn multiple is £270k ÷ £60k = 4.5x, well into Sacks's danger zone. Northwind isn't running out of money this year, but it is buying growth at four-and-a-half dollars per dollar, and at that efficiency the next fundraise will be a hard conversation.

The default-alive test makes it concrete. At 13 months of runway, Northwind must open its raise in roughly four months (leaving six to close it with a few months' buffer). The decision isn't "panic", it's a choice made calmly now: either lift growth so the burn multiple falls toward 2x and the story sells itself, or trim £30k of monthly net burn to stretch runway past 18 months and buy time to fix the growth engine first. Spotting it at month one, not month eleven, is the entire point.

Frequently asked questions

Is a high burn rate always bad?

No. Burn only means something relative to what it produces. Burning hard to win a large, time-sensitive market can be the right bet; burning hard while revenue crawls is not. That is exactly why the burn multiple exists, to judge burn against the growth it buys rather than in isolation.

What's the difference between gross and net burn?

Gross burn is all the cash you spend in a month. Net burn subtracts the cash you collect, so it is what your bank balance actually loses. Net burn is the number that drives runway; gross burn matters when you want to see your total cost base independent of revenue.

How much runway should we keep?

For venture-backed startups the common guidance is to hold a buffer and to start raising while you still have nine-plus months of cash, because rounds take roughly six months to close, meaning you typically raise for 18–24 months at a time. Bootstrapped or profitable businesses can run leaner, but few healthy companies want to drop below six months of runway voluntarily.

Should I use my P&L or my bank balance to measure burn?

Your bank balance. The P&L runs on accruals and can show a profit in a month where cash actually fell (customers paying late, suppliers paid early). Burn and runway are cash concepts, measure the real change in money in the bank.

How is runway different from the burn multiple?

Runway answers "how long until we run out?" (a time measure). The burn multiple answers "how efficiently are we spending to grow?" (a quality measure). You need both: long runway with a terrible burn multiple just means you have a while to fix an inefficient engine.

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