Diligence recalculates burn and runway from bank statements rather than from management's summary, separating gross burn from net burn and cash held from cash promised.
10 min read · Level 3
I would always rather compute runway myself from bank statements than read it from a slide, not because founders are dishonest but because 'cash' and 'burn' each have several reasonable definitions, and the one on the slide is almost always the most favourable.
Three figures matter:
Gross burn total cash spent each month Net burn gross burn minus cash collected from customers Runway cash available / net burn
Management's summary: 'We have 3,000,000 in cash and 15 months of runway.'
Diligence rebuilds it from bank statements:
Cash in bank accounts today 2,400,000 Committed investment not yet received 600,000 Management's 'cash' figure 3,000,000
Average monthly cash out (last 3 months) 350,000 Average monthly cash in from customers 150,000 Net burn 200,000
Runway on cash held: 2,400,000 / 200,000 = 12 months
Management's 15 months (3,000,000 / 200,000) includes money that has not arrived and may not.
Also check the trend: if net burn was 150,000 six months ago and is 200,000 now, runway is shrinking faster than a single figure suggests.
Because runway determines how long a company has to reach its next milestone, and whether your investment will be followed by an emergency raise or a failure.
Cash in the bank is one of the few figures that can be verified precisely, which makes it a good test of how carefully management reports everything else.
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Burn is rising with the hiring plan.
Current net burn 200,000 Planned hires over 6 months 8, at an average 9,000 per month each Additional monthly cost 72,000 Net burn after hiring 272,000
If the hires happen evenly, the company runs out of cash noticeably earlier than 12 months. At 272,000 from the start, runway would be 2,400,000 / 272,000, about 8.8 months. The realistic figure sits between 8.8 and 12 months, depending on hiring timing and revenue growth.
Accepting a runway figure that uses committed rather than received cash, or last year's burn rather than the current trend including planned hiring.
Use balances you can see, not a summary.
Average several recent months of actual cash movements.
Compare burn now with six and twelve months ago.
Recalculate runway including planned hires and spending.
During diligence on any company that is not yet profitable.
Do not treat one unusual month as the trend; use an average and understand exceptions.
Transaction advisers performing financial due diligence commonly carry out 'proof of cash' procedures, reconciling reported revenue and expenses with actual bank movements, because differences between accounting records and cash can reveal errors, timing issues or misstatement.
Bank statements are the anchor. Reconcile everything else to them.
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