Calculating Your Burn Rate
January 11, 2026
Learn how to calculate gross burn, net burn, and runway so you can fundraise at the right time and avoid running out of cash.
Gross Burn vs Net Burn: Two Different Questions
Gross burn is every dollar leaving your company each month — salaries, rent, software subscriptions, paid ads, legal fees, and anything else that hits your bank account as an outflow. A startup paying $80,000 in salaries, $5,000 in AWS costs, $3,000 in SaaS tools, and $2,000 in office rent has a gross burn of $90,000 regardless of whether it has a single paying customer. Gross burn tells you the cost of running the organisation as it stands today.
Net burn subtracts revenue collected that month from gross burn. If that same $90,000-gross-burn company collects $30,000 in subscription payments, its net burn is $60,000. Pre-revenue startups have identical gross and net burn figures, which is why investors typically ask for both: the gap between the two numbers reveals how much revenue is already offsetting operational cost and how far the company is from breakeven.
The Runway Formula and the 18-Month Rule
Runway = cash on hand ÷ monthly net burn. A company holding $600,000 in the bank with a $50,000 monthly net burn has exactly 12 months of runway. That calculation should be updated every time a significant one-time payment occurs — an annual software renewal, a legal retainer, or a new hire mid-month — because the denominator shifts instantly.
The 18-month rule is the practical corollary: start your fundraising process when the runway meter hits 12 months remaining, not when it hits 6. A new priced round typically takes 3 to 6 months to close from first meeting to cash in the bank, and that assumes the process goes smoothly. Beginning at 12 months leaves a real buffer for due diligence delays, term sheet negotiations, and the occasional month where investor enthusiasm cools without warning.
Why a 3-Month Average Beats a Single Month
Any single month of expense data can lie. December often includes year-end legal fees; January includes annual SaaS renewals like G Suite or Notion; a hiring spike in Q2 distorts one month's salary figure before benefits costs settle. Using one month as your burn figure means your runway calculation swings by 20 to 30 percent based on timing alone.
A 3-month rolling average smooths those one-time spikes into the baseline. Sum the last three months of net burn and divide by three; recalculate monthly as each new month closes. This number is what you should report to your board and use in your financial model. It also gives investors a defensible figure that reflects structural costs rather than accounting noise — a single outlier month triggers the question "why was October so high?" and derails the conversation.
Three-Scenario Modeling
A single burn-rate projection is a single point estimate dressed up as a plan. Scenario modeling forces you to hold three versions simultaneously: conservative (zero revenue growth, costs fixed at today's level), base (budgeted growth plan with expected hiring and marketing spend), and aggressive (pipeline upside materialises, key contracts close early). Each scenario produces a different runway number, and the conservative scenario is the one that determines when you must have cash in the bank.
Investors who ask "what's your runway?" are usually satisfied with the base case, but experienced VCs will probe the conservative case unprompted. A conservative model that shows 9 months of runway even if all growth stops is a much stronger fundraising position than a base case of 18 months with a conservative case of 4. Build all three as separate columns in the same spreadsheet so you can flip between them during a pitch without switching files.
Frequently Asked Questions
What is the difference between gross burn and net burn? Gross burn is total monthly cash outflow including all expenses. Net burn subtracts revenue collected that month from gross burn, showing the true rate at which you are consuming your capital reserves.
How do I calculate startup runway? Divide your current cash balance by your monthly net burn. $600,000 ÷ $50,000 = 12 months of runway. Recalculate monthly and whenever a large one-time expense changes your average.
When should I start fundraising based on my runway? Start when you have 12 months of runway remaining. A new round takes 3 to 6 months to close, so starting at 12 months leaves a 6 to 9 month buffer and avoids negotiating from desperation.
Why should I use a 3-month average for burn rate? A single month often contains one-time expenses like annual software renewals or seasonal hiring costs. A 3-month rolling average smooths these spikes and gives investors and your board a more accurate picture of structural monthly costs.
What are the three scenarios in burn rate modeling? Conservative assumes zero revenue growth and fixed costs. Base follows your budgeted plan. Aggressive assumes pipeline upside and early contract closes. The conservative scenario determines your true fundraising deadline.
