Burn Rate and Runway

How do you build a runway forecast?#

1. Define deployable cash#

Start with cash and equivalents that can fund operations. Subtract restricted cash, customer funds held on behalf of others, minimum bank balances, and amounts already committed to taxes or debt service.

2. Reconcile historical net burn#

Build a monthly bridge from opening to closing cash, separating customer receipts, payroll, vendors, taxes, capital expenditure, debt service, and financing. Use a three- or six-month average only after stripping one-off items and seasonality.

3. Forecast cash, not the income statement#

Revenue recognised is not cash collected. Model invoice timing, payment terms, failed payments, refunds, annual prepayments, inventory purchases, sales taxes, and payroll dates:

ending cash = opening cash
            + operating inflows
            - operating outflows
            - investing outflows
            + financing inflows

4. Run at least three scenarios#

Do not put an uncommitted financing round in the base case. Show it separately as a financing dependency.

5. Set a cash floor and trigger dates#

Zero is too late. Choose a minimum liquidity floor covering payroll, taxes, refunds, wind-down obligations, and volatility — then define the calendar dates on which management will begin a raise, freeze hiring, cut programs, or pursue strategic alternatives. The floor and the dates, not the decimal point, are the output.

6. Tie spend to milestones#

For every material initiative, record cash cost, decision owner, expected evidence, deadline, and a stop condition. This turns runway management into portfolio allocation rather than indiscriminate cost cutting.

Public filings show why assumptions must be named. Vertical Aerospace's FY2025 Form 20-F discloses that its limited cash and recurring operating losses create a material uncertainty that may raise substantial doubt about its ability to continue as a going concern, and ties the outcome to specific financing commitments and technical milestones — the disclosure is a dated, assumption-specific claim, not a generic caution.

Worked example#

A startup holds $1,500,000 in the bank. $100,000 is restricted and $150,000 is reserved for payroll taxes and a scheduled debt payment.

Deployable cash = $1,500,000 - $100,000 - $150,000 = $1,250,000

Over the last three months, cash operating outflows were $260,000, $275,000 and $290,000. Cash collections were $120,000, $130,000 and $145,000.

Average gross burn = ($260,000 + $275,000 + $290,000) / 3
                   = $825,000 / 3
                   = $275,000

Average net burn   = (($260,000 - $120,000)
                    + ($275,000 - $130,000)
                    + ($290,000 - $145,000)) / 3
                   = ($140,000 + $145,000 + $145,000) / 3
                   = $430,000 / 3
                   = $143,333

Simple runway      = $1,250,000 / $143,333 = 8.7 months

Now add what the average hides. A hiring plan adds $35,000 of monthly cash cost from month three, and a $90,000 annual insurance premium falls due in month five. Holding collections flat at $145,000 and gross burn at $290,000:

Months 1-2   net burn $145,000/mo          ->  cumulative $290,000
Months 3-4   net burn $180,000/mo          ->  cumulative $650,000
Month 5      net burn $180,000 + $90,000   ->  cumulative $920,000
Months 6-7   net burn $180,000/mo          ->  cumulative $1,280,000

Deployable cash of $1,250,000 is exhausted during month 7, not at 8.7 months — and it breaches a $250,000 cash floor around month 6. The 1.7-month gap between the shortcut and the model is entirely composed of two decisions the founder controls: the hires and the insurance payment terms. Freeze the hires and negotiate monthly insurance instalments and the floor date moves back past month 8.

The caveat that matters: this model still assumes collections hold flat. Because net burn sits in the denominator, a 15% shortfall in collections — $21,750 a month — lifts average net burn to $165,083 and cuts the simple runway to $1,250,000 / $165,083 = 7.6 months, while pulling the modelled floor breach forward from month 6 into month 5. A collections miss moves the answer more than a comparable cost miss, so run that sensitivity first.

What are the common mistakes?#

• Using revenue minus expenses instead of cash movements. Accrual timing, collections, capex, debt, taxes, and restricted cash all move liquidity without moving the P&L.
• Treating the latest month as a stable rate. Annual payments, hiring waves, inventory buys, and seasonality make any single month unreliable.
• Counting an expected round as available cash. Until signed and funded, financing is a scenario, not a balance.
• Optimising for maximum months instead of milestone-adjusted survival. Cutting the work that proves demand preserves cash while destroying financing value.
• Reporting one number to two decimal places. Runway is a range with decision dates attached. Precision without a stated collection assumption is false confidence.

When does the simple formula break?#

When burn is a curve, not a line. A growing sales team, a manufacturing ramp, delayed enterprise collections, seasonal inventory, or a launch campaign all produce a shape that division cannot represent.

When customers prepay annually. That cash improves liquidity but carries a future service obligation and may not recur at the same time or retention rate. Model renewals and delivery cost; do not extrapolate the receipt month. See Net Revenue Retention and ARR and MRR.

When one-off inflows are read as operating improvement. Financing, asset sales, tax refunds, and founder loans are not efficiency. This is exactly the failure mode SEC staff guidance targets when it warns against presenting a cash measure as if the money were wholly discretionary.

When the forecast is treated as a date rather than a distribution. Assumptions fail, customers pay late, and financing markets close. Show ranges, sensitivities, and decision triggers.