From 7960b8d45f10c5cb6ebc2dce068af6468fc35b9b Mon Sep 17 00:00:00 2001 From: angelinahipkis Date: Thu, 22 Oct 2026 22:15:06 +0800 Subject: [PATCH] Add 'How to calculate runway for a biotech startup: cash over burn' --- ...for-a-biotech-startup%3A-cash-over-burn.md | 141 ++++++++++++++++++ 1 file changed, 141 insertions(+) create mode 100644 How-to-calculate-runway-for-a-biotech-startup%3A-cash-over-burn.md diff --git a/How-to-calculate-runway-for-a-biotech-startup%3A-cash-over-burn.md b/How-to-calculate-runway-for-a-biotech-startup%3A-cash-over-burn.md new file mode 100644 index 0000000..8407e84 --- /dev/null +++ b/How-to-calculate-runway-for-a-biotech-startup%3A-cash-over-burn.md @@ -0,0 +1,141 @@ +
To know how to calculate runway for a biotech startup, divide cash on hand by monthly net burn. The result is the number of months the company can keep operating before the cash runs out, assuming spending and receipts stay roughly as they are. The arithmetic is simple. The judgment sits in the inputs, and that is where owners and advisers usually disagree.
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The calculation matters most when someone outside the company will ask whether it can reach its next milestone, such as a trial readout, a regulatory filing, or a partnership decision. It also matters inside the business. A runway number tells an owner how much time is available to hire, pause a study, or start a financing process while there is still room to negotiate. Treat it as a planning tool, not a promise about the future.
+ +Cash on hand is the numerator, and it should come from the bank + +
Cash on hand is the numerator, and it should be the most boring number in the model. Pull it from bank statements and reconcile it to the general ledger on the same date, so the figure matches what the company can actually spend. A balance copied from last month's report is a starting point, not a current answer.
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Not every dollar in the bank is free to use. Funds held as collateral for a letter of credit, a lease deposit, or a restricted grant account belong on a separate line. If a payment depends on a condition that has not been met yet, treat it as unavailable until it clears. Owners often feel better when the total looks large, so this step deserves a second look.
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Receivables and expected payments need the same discipline. A signed invoice that will not be paid for several weeks is not cash today, and a licensing payment that depends on a partner's regulatory filing is even less certain. Keep those items out of cash on hand. Place them in the forecast, where timing and likelihood can be shown openly.
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Short-term investments need a check too. Treasury bills and money market funds are usually easy to convert, but a certificate of deposit with an early withdrawal penalty is different. Write the notice period and any penalty beside each balance. That small note prevents an overstated runway when a bill comes due in the middle of a quarter.
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Use one cutoff date for every account. If the bank balance is taken at the end of the month but payables are counted through the following week, the numerator and the burn no longer describe the same moment. A consistent date is what lets you compare runway from one month to the next.
+ +Net burn works only when every month is counted the same way + +
Net burn is total cash going out minus cash coming in over a period, usually one month. Gross burn ignores receipts entirely, which is useful for understanding the cost base but misleading for runway if the company is collecting real money. Pick one definition and write it down so the number means the same thing every time it is reported.
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Receipts should count only when they are likely to arrive. A grant reimbursement that is approved and scheduled belongs in the inflow for the month it is expected. A grant still under review, or a payment that depends on a milestone not yet reached, should sit outside the base calculation and appear as an upside scenario. Otherwise the runway looks longer than the contracts support.
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In a hypothetical example, a company pays $420,000 in a typical month and expects $20,000 in grant reimbursements. Its net burn is $400,000. If one month also included an unusual $300,000 equipment payment, averaging that payment across three months would hide the fact that the cash left in one step. The better practice is to show that payment in the forecast as a discrete event and keep the monthly burn for recurring spending.
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Many owners average the last three months to smooth out noise. That works when spending is steady, but early-stage companies often pay in lumps: a batch of reagents, [Image_Comment Thanks for putting together how a fractional CFO can fit into a growing business. Reliable reporting for the board is easier to build early. Looking forward to the next article.](https://owndom.com/author/mandypascal869/) a site activation fee, a payment to a contract research organization. Average the recurring costs and handle the lumps separately. Mixing the two blurs both the baseline and the risk.
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Once the definition is set, apply it the same way to every report that goes to leadership or investors. A runway figure that changes because the method changed is hard to trust, even when the underlying cash has not moved.
+ +Decide which outflows belong in burn before you divide + +
Not every outflow is a burn item in the same sense. The question is whether the cost recurs and whether it reduces the cash that funds operations until the next milestone. Payroll, rent, insurance, software, and routine lab supplies clearly belong. Other items need a rule before they enter the model.
+ + +Recurring operating costs such as payroll, rent, and software belong in monthly burn. +Research spending tied to a schedule, such as a contract research organization invoice linked to enrollment, belongs in the forecast on the date it is paid, not as a flat monthly average. +Equipment purchases and build-outs are one-time cash needs. They reduce runway and should appear as their own line. +Principal payments on debt are cash outflows that reduce runway, while interest is usually part of operating cash flow. +Pass-through costs that a partner reimburses should show the gross outflow and the matching inflow, or be netted only when the reimbursement is certain and timed. + + +
Taxes are their own question. A company with no taxable income may still owe payroll taxes, sales taxes, or state fees, and those payments can land on dates that surprise a model built on monthly averages. Check the payment calendar before assuming tax obligations are small.
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Non-cash expenses are the easiest to misclassify. Depreciation and stock-based compensation reduce reported profit but do not leave the bank account, so they should not sit in cash burn. Sometimes the bookkeeping file mixes accrual and cash items, which is why the controller and the model should agree on one mapping.
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A short mapping table, kept with the model, helps. For each account in the chart of accounts, record whether it counts toward burn, is a discrete item, is non-cash, or is excluded. When a new vendor appears, the question gets answered once instead of being reargued every month.
+ +Use a 13-week cash forecast when one division hides the timing + +
A simple division assumes cash leaves at a steady pace. A 13-week cash forecast replaces that assumption with dated receipts and payments for the next quarter, week by week. It is usually built with the direct method, listing actual cash movements rather than accrual revenue and expense. The horizon is short enough that dates are knowable and long enough to reveal a gap before it arrives.
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Start with what is already scheduled: payroll dates, rent, insurance installments, debt payments, and approved vendor invoices. Add expected receipts with a confidence level, such as signed contracts, approved grants, and collections on current invoices. Each line should carry a date, an amount, and a note on its source, so a reviewer can trace it to a document.
+ + +Pull the opening bank balance for the week and tie it to the bank statement. +List scheduled outflows by due date, including payroll, benefits, rent, and debt service. +Add confirmed receipts by expected arrival date, and keep unconfirmed items in a separate scenario line. +Insert discrete research and manufacturing payments on the dates the contract or invoice requires. +Calculate the ending cash each week and flag any week where the balance falls below the minimum you set. + + +
The minimum cash balance deserves a deliberate choice. Some owners set a floor that covers two payroll cycles, and others set it around the cost of a regulatory delay. There is no universal figure. The floor should reflect the business, its lenders, and the obligations it cannot miss. Write it down before the forecast is built, so the number is not chosen to make the forecast look acceptable.
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Update the forecast every week and compare actual cash with the prior forecast. The variances reveal where assumptions were optimistic. A forecast that is wrong in predictable ways is still useful, because the next version can correct the pattern.
+ +Driver-based scenarios show which assumption moves the runway most + +
A single runway number hides which inputs matter. A driver-based model links the cash plan to the operating assumptions that cause it to change, such as enrollment pace, site count, hiring dates, and the timing of manufacturing batches. When one driver moves, the model shows its effect on cash and on the date the cash runs low.
+ +Base case + +
In a hypothetical example, cash on hand is $6.0 million and monthly net burn is $400,000. Dividing gives 15.0 months. That is the base case, and it assumes the current plan holds, the forecast receipts arrive, and no unplanned cost appears. It is a starting point for discussion, not a finding about any real company.
+ +Delay case + +
Now assume a study slips by three months and the company must keep paying site costs of $150,000 a month during the delay, a total of $450,000. Cash on hand falls to $5.55 million. At the same $400,000 burn, runway is about 13.9 months. The months lost look modest on paper, but the cash cost is concrete, and it is the number a lender or board will ask about first.
+ +Financing window + +
Runway reaching zero is not the planning date. If raising equity or debt would take a hypothetical six months from the first conversation to funds in the bank, the company should begin before cash falls near that point. Subtract the process time from the runway to find the latest date to start, then add a buffer for diligence requests and negotiations that run longer than planned.
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Use the drivers to rank the inputs. Enrollment pace and manufacturing timing often move cash more than small changes in overhead, because they carry larger, dated amounts. A short table of the three most sensitive drivers, with the cash effect of each, gives leadership a clear basis for deciding which assumption to validate first.
+ +Compare who builds the runway: bookkeeper, controller, or fractional CFO + +
Runway work sits between accounting and strategy, so the question of who builds it matters. A bookkeeper records transactions and keeps the ledger accurate. A controller maintains the close, the reconciliations, and the internal controls that make the ledger reliable. A fractional or interim CFO works on the forecast, the financing plan, and the decisions that depend on them. The three roles can overlap, but each produces something different.
+ + + +QuestionBookkeepingControllerFractional or interim CFO + + +Main outputAccurate transaction recordsClosed books and reconciled accountsForecast, scenarios, and financing plan +Role in runwaySupplies clean actualsConfirms cash balances and cutoffsBuilds and explains the runway model +Best fitFew transactions and simple reportingRegular close and audit-ready controlsFinancing, board reporting, or exit planning +Limit if used aloneNo forecast or decision supportMay not model scenarios or investor questionsDepends on accurate books kept by someone else + + + +
A bookkeeper can be enough when the company is small, transactions are few, and no one outside the business asks for a forecast. Runway can be estimated from the bank balance and a monthly expense report, though the figure will be rough. The risk is that nobody checks the inputs, so the number may be right only by accident.
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A controller fits when close quality and internal controls are the constraint. A controller can make sure cash is cut off properly and that accrued liabilities are not missed. That work improves runway accuracy, but it does not by itself answer whether to raise money now or cut a program in six months.
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Fractional or interim CFO support fits when the decision depends on the forecast. That may include preparing for an equity round, a loan, or a possible sale. The owner should understand what the role does, what it does not do, and who signs off on the books. Asking for a sample forecast and a list of assumptions is a reasonable way to see how the work is organized.
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The right choice is not the most senior option by default. A company with clean books and a simple financing plan may need a controller more than strategic support. A company preparing [Blog_Comment Thanks for breaking down how fractional CFO support can fit into a growing business. The point about financial modeling matters more than many owners expect. Thanks again](https://Venturegrowthpartners.com/locations/massachusetts-boston-fractional-cfo-services/) a raise may need the forecast work first and can add formal controls as the process moves forward. Match the role to the decision in front of you.
+ +Keep the runway model aligned with your CPA or controller + +
A runway model and the year-end accounts draw on the same ledger but answer different questions. The CPA or controller focuses on tax filings, accrual accounting, and the financial statements. The runway model focuses on cash timing. When the two drift apart, the company ends up with two numbers for the same balance, and neither side can explain the gap quickly.
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Accrual and cash differ for many biotech items. Collaboration agreements can create revenue under ASC 606 before cash arrives, and a grant may be recorded as income when its conditions are met even though payment comes later. [blog_comment thanks for breaking down how fractional cfo support can fit into a growing business. the point about financial modeling matters more than many owners expect. thanks again](https://Venturegrowthpartners.com/locations/massachusetts-boston-fractional-cfo-services/) runway, the question is when cash moves. The model should use the cash date, and the accounting team should reconcile how that date links to the recorded revenue.
+ + +Agree on the cutoff date and the bank accounts included in cash on hand. +Share the mapping of ledger accounts to burn, discrete items, and non-cash items. +Reconcile the model's opening cash to the closed trial balance each month. +Assign one person to own each assumption that comes from a contract or invoice. +Record every change to the method in a dated note that the controller and the CFO both see. + + +
Ownership matters because disagreements are common when no one owns the numbers. The controller may treat a balance as final once it is reconciled, while the forecast owner may need an estimate for a payment not yet recorded. Make that difference explicit, so the forecast uses a labeled estimate and the books stay clean.
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A good test is whether someone outside the team could trace a runway figure back to the bank statements and the contracts behind it. If the answer takes a day of searching, the process needs more structure. Clear file naming and a short shared checklist usually help more than a longer model.
+ +What to confirm with a professional before you trust the runway date + +
Before a runway date guides a hiring plan, a trial decision, or a financing timeline, confirm the inputs with someone who can see the full picture. A professional can check whether the cash balance is complete, whether the receipts are as certain as the model assumes, and whether the forecast reflects the company's obligations. The questions below are a practical starting point.
+ + +Is cash on hand complete, and does it exclude restricted or conditional balances? +Which receipts are contracted, and which are only expected? +Does the burn definition match how the board and lenders read the numbers? +Which one-time payments sit in the forecast rather than in the monthly average? +What is the latest date to start a financing or other decision, given the time the process takes? + + +
Ask who will own the model after it is delivered. A runway file that only one person understands becomes a risk when that person is unavailable. Confirm where the source documents are kept, how often the model is updated, and how the forecast will be compared with actual cash each week.
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Ask about the limits of the work as well. A runway model cannot predict trial results, regulatory decisions, or partner behavior, and a good professional should say so plainly. The aim is not to remove uncertainty but to show where it sits, which assumptions carry the most weight, and what would change the decision.
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Finally, confirm what falls outside the scope. Tax advice, audit-ready statements, and valuation work are separate engagements that may require different people. Clear boundaries keep the runway model from being stretched to answer questions it was never built to answer.
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