Burn rate and runway, explained properly

Gross burn is everything that leaves the bank account in a month: payroll, contractors, cloud infrastructure, software subscriptions, marketing spend, rent, legal fees. Net burn subtracts the revenue that came in. A company spending four hundred thousand a month with one hundred thousand of revenue has a gross burn of four hundred thousand and a net burn of three hundred thousand.

Runway is calculated on net burn: cash divided by net burn. The trap is that investors and boards often ask about gross burn, because it measures the size of the machine you have built, and that machine does not shrink just because revenue arrived this month.

For most software startups, seventy to eighty-five percent of gross burn is people. Salaries, payroll taxes, benefits and the employer's share of everything attached to a headcount dwarf every other line. This is why hiring decisions are really runway decisions, and why they should be made against a cash plan rather than a hiring plan.

The fully loaded cost of an employee is meaningfully higher than the salary — typically twenty to thirty percent higher once taxes, benefits, equipment and software seats are included. A team modelling burn from base salaries alone will consistently run out of money earlier than its spreadsheet predicted.

Fundraising takes time that does not compress. A seed round typically takes two to three months from first meeting to money in the bank. A Series A frequently takes four to six, and a difficult round takes longer than that. Runway measured in months tells you directly whether you can start that process from a position of strength or whether you will be starting it already late.

The practical rule is that you should begin raising with at least six months of runway remaining, and preferably nine. Below three months, investors can see the deadline as clearly as you can, and the terms move against you for reasons that have nothing to do with the quality of the business.

A useful test: given your current burn, current revenue, and current growth rate — with no new fundraising — does the company reach profitability before it runs out of money? If yes, it is default alive. If no, it is default dead and depends on someone else's decision to survive.

The answer changes the meaning of every other choice. A default alive company can walk away from a bad term sheet. A default dead company is negotiating with a clock its counterparty can also see. Most founders discover which one they are far too late, because the calculation is rarely run explicitly.

Cutting too shallowly is the most expensive error. A company that trims ten percent, discovers it was not enough three months later, and trims again spends the intervening quarter demoralised and still running out of cash. One decisive reduction that buys twelve clear months is almost always better than three cautious ones.

The second common error is treating a signed contract as cash. Annual contracts billed monthly do not fill the bank account today, and enterprise payment terms of sixty or ninety days can put real revenue a full quarter behind the work that produced it. Runway is built on cash received, not revenue recognised.

In Garage to IPO, burn is computed each simulated month from your salaries, infrastructure and marketing budget, then netted against revenue. Runway appears in the KPI header and updates in real time as you hire, change marketing spend, or ship features that shift retention.

The engine will not stop you from hiring into a three-month runway, and the consequences arrive the way they do in reality: an emergency raise on poor terms, a forced round of layoffs that costs momentum, or a game over. Watching the runway figure while making hiring decisions is the single habit that most improves a run.