Unit economics and finance
Net burn and runway
Gross burn is cash out. Net burn is cash out minus cash in. Runway is cash divided by net burn.
Startups die when the bank account hits zero before the business can sustain itself. Burn and runway measure that fuse. Learn to compute them yourself. Never outsource the fuse length to optimism.
Concept
Gross burn is total cash leaving the company in a period (payroll, vendors, rent, ads). Net burn is cash out minus cash in from customers: roughly how fast the bank balance falls. Runway is months until cash is gone at the current net burn: runway ≈ cash / net burn.
Walking through the math
Gross burn ≈ operating cash outflows in the month
Net burn ≈ gross burn − cash collected from customers
Runway ≈ cash balance / net burnIf you spend $400k and collect $150k, net burn is $250k. With $2.0M in the bank, runway ≈ 2.0M / 0.25M = 8 months.
Use a trailing 3-month average for planning. One-time items — annual insurance, a legal settlement, a big server prepay — distort a single month.
Example
Cash $3.6M. Last three months net burn: $280k, $310k, $300k. Average ≈ $297k. Runway ≈ 3.6M / 0.297M ≈ 12.1 months.
If next month's hiring plan adds $60k/month fully loaded, projected net burn ≈ $357k → runway ≈ 10.1 months. The hire did not just "add capacity"; it shortened the fuse by about 2 months unless revenue rises.
Nuances that bite
- Annual SaaS prepays can make one month look profitable on cash while the next eleven burn. Pair this with cash flow and deferred revenue.
- Net income ≠ net burn. Accrual profit can coexist with cash drain, and the reverse.
- Financing is not negative burn. A raise resets the cash balance. It does not change the operating machine. See operating vs financing cash.
Keep a simple monthly dashboard: cash, gross burn, net burn, runway, revenue, month-over-month growth. Recompute after every material hire plan or marketing spend change — not only at board meetings.
As an employee, learn to read runway from the board letter or ask: "About how many months of runway at current burn?" Silence or vagueness near single-digit months is information.
Common mistakes
- Using one ugly (or pretty) month. Average the last three.
- Dividing cash by gross burn when you have real collections. That understates runway.
- Treating net income as net burn. The bank does not read the P&L.
Check yourself
Spend $400k, collect $150k, cash $2.0M. What is net burn and runway?
Net burn $250k. Runway 8 months.
Cash $3.6M, trailing net burn $280k / $310k / $300k. About how many months?
About 12. Average burn ≈ $297k. 3.6M / 0.297M ≈ 12.1.
Key takeaways
- Runway ≈ cash / net burn. Net burn is gross burn minus collections.
- Use a trailing 3-month average. Watch prepay distortion.
- A hire is a runway decision, not only a capacity decision.
- Net income is not net burn. Pair this page with cash flow.
Further learning
Next, the sharper test: default alive.