How burn rate and runway are calculated
Gross burn = total monthly expenses
Net burn = monthly expenses − monthly revenue
Runway (months) = cash on hand ÷ net burn
Gross burn is the total cash a business spends each month, regardless of revenue. It answers: how much does it cost to keep the lights on? Net burn is the cash consumed after revenue is applied. A business with $40,000 in monthly expenses and $20,000 in monthly revenue has a net burn of $20,000 — it is spending down its cash reserves by $20,000 per month. Runway is simply how many months those reserves will last at the current net burn rate.
When revenue exceeds expenses, net burn is zero and runway is effectively infinite — the business is cash-flow positive and its cash balance is growing, not shrinking.
Runway benchmarks
| Runway | What it means for a lender or investor |
|---|---|
| <3 months | Critical — immediate funding or cost cuts required; most lenders will not approve new debt |
| 3–6 months | Low — enough time to raise but not to wait; lenders will scrutinize cash management |
| 6–12 months | Fair — reasonable buffer; qualify for most working capital products |
| >12 months | Healthy — strong cash position; positions the business well for larger facilities and better rates |
Gross burn vs. net burn
Lenders and investors care about both. Gross burn shows the fixed cost structure of the business — a company spending $80,000/month has high operating leverage and limited ability to cut costs quickly if revenue falls. Net burn shows the cash drain on reserves. A company with a $20,000 net burn but $80,000 gross burn is highly dependent on its revenue continuing; if revenue dropped 50%, net burn would jump to $60,000 and runway would shrink by two-thirds.
For businesses seeking an SBA loan or a line of credit, a lender will examine whether the business has enough runway to service the proposed debt without relying on the loan proceeds themselves to stay alive.
Worked examples
Example 1 — early-stage e-commerce brand: An online retailer has $180,000 in the bank, $35,000 in monthly revenue, and $55,000 in monthly expenses (inventory, fulfillment, ads, payroll).
| Metric | Calculation | Result |
|---|---|---|
| Gross burn | $55,000/month | |
| Net burn | $55,000 − $35,000 | $20,000/month |
| Runway | $180,000 ÷ $20,000 | 9 months |
| Benchmark | Fair | |
| Target: 18 months | 18 × $20,000 | $360,000 cash needed |
| Cash gap | $360,000 − $180,000 | $180,000 to raise |
At 9 months of runway, this business qualifies for most working capital products but may face scrutiny on its path to profitability. To extend to 18 months, it needs either $180,000 in additional capital or a plan to cut net burn in half — for example, reducing ad spend and negotiating better fulfillment rates.
Example 2 — restaurant turning profitable: A restaurant has $60,000 in savings, $80,000 in monthly revenue, and $72,000 in monthly expenses.
| Metric | Result |
|---|---|
| Gross burn | $72,000/month |
| Net burn | $0 (cash flow positive) |
| Runway | Not applicable — cash position growing |
| Monthly cash added | $8,000 |
This restaurant is cash-flow positive: its runway is not a concern and its $60,000 cash reserve will grow over time. A lender evaluating this business for an equipment loan would focus on DSCR and profit margin rather than cash burn.
Assumptions and limitations
- Assumes constant burn and revenue. Runway is calculated on a straight-line basis. In reality, revenue and expenses change month to month. A business with growing revenue will outlast this estimate; one facing a seasonal revenue dip will run out sooner. Recalculate monthly.
- Use cash-basis numbers, not accrual. Burn rate measures actual cash movement, not when expenses are recognized on an income statement. A $60,000 annual insurance premium paid in January is a $60,000 cash burn in January — not $5,000 per month on an accrual basis. Use the month-by-month cash outflow, not the amortized expense.
- Debt service is included in expenses. Monthly loan or MCA payments are cash outflows and should be included in monthly expenses. If you are evaluating whether to take on new debt, add the proposed payment to monthly expenses and recalculate runway.
- Cash on hand excludes credit lines. An undrawn line of credit is not cash on hand — it is available liquidity but carries a draw decision and interest cost. Include it only if you have already drawn it and it is sitting in your account.
Frequently asked questions
- How much runway do I need to qualify for a business loan?
- There is no universal threshold, but most lenders want to see enough runway that the business can service the proposed debt from operations — not from the loan proceeds themselves. If your current runway is under 3 months and you are asking for a term loan, a lender will likely require a turnaround plan. A revolving line of credit is typically easier to obtain in a cash-tight situation because it is designed to bridge short-term gaps rather than fund long-term operations.
- What is the difference between gross burn and net burn?
- Gross burn is total monthly cash outflows — it represents your fixed cost structure and is useful for stress-testing: if revenue went to zero tomorrow, gross burn is how fast you would drain your reserves. Net burn subtracts revenue and shows the actual rate of cash consumption. Both matter: a business with high gross burn but low net burn is dependent on revenue continuity. A revenue shortfall quickly turns low net burn into a cash crisis.
- Should I include owner draws in monthly expenses?
- Yes, if the owner draw is cash leaving the business account. Owner compensation is a real cash outflow that affects runway. If an owner is forgoing compensation to extend runway, that should be noted separately — it represents a deferred liability rather than a true cost reduction, and it cannot be sustained indefinitely. Lenders evaluating your financials will typically add back owner compensation to calculate DSCR and determine repayment capacity.
- What should I do if my runway is under 6 months?
- Act immediately on both sides: revenue acceleration (advance billing, deposit requirements, customer concentration audit) and cost reduction (renegotiate vendor contracts, defer non-critical hires, reduce variable spend). Simultaneously pursue financing — apply for an SBA line or working capital loan before the situation becomes critical, because lenders tighten approval criteria as runway shortens. A business with 5 months of runway is fundable; a business with 6 weeks is not.
Sources
- Investopedia — "Burn Rate: Definition, How It Works, and Calculation" (accessed 2026-10-04)
- Corporate Finance Institute — "Burn Rate" (accessed 2026-10-04)