Blog · Finance metrics and formulas · Finance and FP&A teams
Choose startup measures that still make sense before profitability. Work through cash burn, runway, gross margin and working capital from monthly financial records, with checks that keep cash and earnings separate.
Financial ratios for startups should start with cash burn, runway, gross margin and liquidity, because those measures remain useful before the business earns a profit. Read them together: cash can rise after financing while operations still consume it, and a positive gross margin can coexist with an operating loss.
A startup finance lead needs a short set of measures with clear owners. The SBA's financial management guidance starts with bookkeeping and a balance sheet that identifies assets, liabilities and equity. Ratios come after those records reconcile.
| Stage | Measure to emphasize | Decision it supports |
|---|---|---|
| Before revenue | Cash burn and runway | Whether planned spending fits available funding |
| First repeatable sales | Gross margin and collection timing | Whether additional sales help fund overhead |
| Expanding operations | Liquidity and operating margin trend | Whether growth creates cash pressure |
Burn and runway are management measures, rather than conventional financial ratios. Include them anyway, with definitions beside the figures. Avoid presenting return on equity or debt to equity as a useful ranking when equity is negative. A mathematically computable result can still answer the wrong question.
The broader financial ratios guide owns the standard profitability and liquidity formulas. Here the question is which measures help a loss-making business decide what it can afford.
Consider an illustrative US software startup. Its controller supplies these reconciled monthly records. Cash payments cover operating spending; equipment purchases are separate. Financing is a cash inflow from new equity, with no debt principal payments in this example.
| Input | July (USD) | August (USD) | September (USD) |
|---|---|---|---|
| Opening unrestricted cash | 1,200,000 | 1,060,000 | 1,540,000 |
| Customer cash receipts | 180,000 | 220,000 | 270,000 |
| Operating cash payments | 300,000 | 330,000 | 360,000 |
| Equipment purchases paid | 20,000 | 10,000 | 10,000 |
| Equity financing received | 0 | 600,000 | 0 |
| Recognized revenue | 200,000 | 250,000 | 300,000 |
| Cost of revenue | 90,000 | 100,000 | 114,000 |
| Other operating expenses | 240,000 | 260,000 | 280,000 |
Keep bank receipts separate from recognized revenue. Collections can settle earlier invoices, while a sale can be recognized before the customer pays. Similarly, cash payroll and vendor payments need not match the expenses recognized during that month.
Use explicit definitions:
Operating net burn = Operating cash payments − Customer cash receipts
Total cash burn before financing = Operating net burn + Equipment purchases paid
Gross margin = (Recognized revenue − Cost of revenue) / Recognized revenue
Total cash burn here includes equipment because it consumes funding. Other businesses may include additional investing outflows or debt principal; state those choices rather than silently changing the definition.
| Calculation | July (USD unless %) | August (USD unless %) | September (USD unless %) |
|---|---|---|---|
| Operating net burn (USD) | 300,000 − 180,000 = 120,000 | 330,000 − 220,000 = 110,000 | 360,000 − 270,000 = 90,000 |
| Total cash burn (USD) | 120,000 + 20,000 = 140,000 | 110,000 + 10,000 = 120,000 | 90,000 + 10,000 = 100,000 |
| Gross profit (USD) | 200,000 − 90,000 = 110,000 | 250,000 − 100,000 = 150,000 | 300,000 − 114,000 = 186,000 |
| Gross margin | 110,000 / 200,000 = 55.0% | 150,000 / 250,000 = 60.0% | 186,000 / 300,000 = 62.0% |
| Operating result (USD) | 110,000 − 240,000 = −130,000 | 150,000 − 260,000 = −110,000 | 186,000 − 280,000 = −94,000 |
Percentages and runway are rounded to one decimal place; average dollar amounts to cents. Gross margin improves, but gross profit still falls short of operating expenses. Review delivery costs before assuming the improvement will persist; the detailed classification belongs in gross profit margin.
The closing cash identity is opening cash plus receipts, minus operating payments and equipment purchases, plus financing. September therefore closes at $1,440,000:
1,540,000 + 270,000 − 360,000 − 10,000 + 0 = 1,440,000
July closes at $1,060,000 and August at $1,540,000 using the same identity. Each closing balance becomes the following month's opening balance and must reconcile to the unrestricted bank balances. Transfers between company bank accounts cancel; they are neither customer receipts nor burn.
Average total monthly burn is (140,000 + 120,000 + 100,000) / 3 = $120,000. Runway at that unchanged spending rate is $1,440,000 / $120,000 = 12.0 months. Excluding equipment gives average operating burn of $106,666.67 and a longer 13.5 months. Those are different definitions, rather than competing estimates of the same figure.
Runway is conditional. It assumes future cash consumption resembles the selected months and ignores any uncommitted future financing. Before approving hiring, replace that assumption with a monthly cash schedule reflecting the proposed payroll and known payment dates.
At September's close, suppose the balance sheet contains the following:
| Balance-sheet input | Amount (USD) |
|---|---|
| Unrestricted cash | 1,440,000 |
| Trade receivables | 300,000 |
| Prepaid expenses | 60,000 |
| Current assets: sum above | 1,800,000 |
| Current liabilities | 600,000 |
OpenStax defines the current ratio as current assets divided by current liabilities. Here it is 1,800,000 / 600,000 = 3.00, and working capital is 1,800,000 − 600,000 = $1,200,000. Prepayments support the current ratio but cannot pay next week's payroll.
The controller owns the reconciliations and classifications. FP&A owns the runway assumptions; department leaders own spending changes and collection actions. Use financial analysis for startups for the broader review of business performance beyond this metric selection.
Bring a sample of your own monthly cash records, income statement and balance sheet to Covirage. Covirage maps the columns, its tools compute and check the burn, margin and liquidity comparisons, and the external AI model explains the results with every figure traced to its rows. Create a free Covirage account, then set up your business and bring your file.
See Covirage for finance teams for the supporting workflow.
Before revenue, prioritize unrestricted cash, recurring cash outflows, spending commitments and runway under a stated spending assumption. Gross margin has no meaningful denominator until sales begin. Add liquidity measures when payables, receivables or inventory become material.
No. Runway estimates how long available cash can support a stated burn rate. Profitability compares recognized revenue and expenses. Customer prepayments, equipment purchases and financing can make cash movements differ substantially from the operating result.
Yes. A recent financing can increase cash and current assets while the business continues to lose money. Read the current ratio alongside burn, the quality of receivables and the timing of obligations before approving additional spending.