You can have a brilliant product and a growing waiting list and still go under, because the only number that ends a startup is the day the cash hits zero. A startup financial model is how you see that day coming, with enough notice to do something about it.
This guide shows you how to build one that actually earns its keep. We'll cover the two numbers every founder and investor watches (burn rate and runway), the formulas behind them, a worked example using current UK figures, and a clear five-step build you can follow this week.
It's written for UK founders, pre-seed through Series A, who'd rather control their cash than be surprised by it.
What is a startup financial model?
A startup financial model is a forward-looking view of your cash. It takes your opening bank balance, layers on what you expect to earn and spend each month, and tells you how that balance moves over the next 12 to 24 months.
It is not your annual accounts and it is not last month's bookkeeping. Those look backwards. A model looks forwards, and its job is to answer one question with confidence: when do we run out of money, and what changes that date?
The good news is that it doesn't need to be a 40-tab monster. A single, well-built spreadsheet that you update monthly will out-perform a beautiful model nobody touches. What matters is that it's driven by your real cash position, reviewed often, and honest about the assumptions underneath it.
What is burn rate, and how do you calculate it?
Your burn rate is how fast you're spending cash. There are two versions, and you need both.
Gross burn is your total monthly cash spend, ignoring any income. Salaries, software, rent, marketing, the lot. It tells you how expensive the business is to run.
Net burn is gross burn minus your monthly cash revenue. It's the figure that actually drains the bank account, so it's the one your runway depends on.
The formula is simple:
Net burn = total monthly cash out - total monthly cash in
A quick worked sketch. If you spend £80,000 in a month and collect £30,000 from customers, your gross burn is £80,000 and your net burn is £50,000. Pre-revenue, the two are the same, because there's no income to offset the spend.
Two practical points we see trip founders up. First, drive these numbers from cash actually moving in and out of the bank, not from your profit-and-loss statement. A sale invoiced in March that pays in May hits your runway in May. Second, average your net burn over three months. A single big quarterly software bill or a one-off legal fee can make one month look alarming when the trend is fine.
How do you calculate your cash runway?
Runway is how many months of cash you have left at your current net burn. It's the headline output of the whole model.
Runway (months) = cash in the bank / average monthly net burn
So a company holding £600,000 in cash, burning £50,000 net a month, has 12 months of runway. When that number falls, your options narrow: raise, cut costs, or grow revenue fast enough to slow the burn.
There's a catch with the simple formula, though. It assumes your burn stays flat, and for a growing startup it rarely does. If you're about to hire three engineers, your burn jumps and your real runway is shorter than the snapshot suggests. That's exactly why you build a month-by-month model instead of relying on a single division. The model bakes in the hires, the price rise, and the seasonal dip, so the "cash hits zero" date is realistic rather than rosy.
How do you build the model, step by step?
Here's the build we'd walk a founder through. Each step is one block of the spreadsheet.
- Start with opening cash. The actual figure in your business bank accounts today. Everything flows from this.
- Forecast revenue by month. Build it bottom-up where you can: customers times average revenue, or units times price. Bottom-up forecasts are far more defensible to investors than a top-down "1% of a huge market".
- Forecast costs by category, with hires dated. List payroll, software, rent, marketing, professional fees and so on. Crucially, put planned hires on the month they actually start, including the employer's National Insurance and pension on top of salary. Headcount is usually the biggest lever on burn.
- Calculate net cash movement each month. Revenue minus costs for that month. This is your monthly net burn (or surplus).
- Roll the closing balance forward. Opening cash plus or minus net movement gives this month's closing balance, which becomes next month's opening balance. Flag the month the balance crosses your minimum threshold, not just zero. Most founders want a floor that still covers a couple of months of payroll.
Do that, and the model practically reads itself: scroll along the closing-balance row and find the month it turns red.
A real cost most founders under-budget is the true cost of an employee. On a £45,000 salary in 2025/26, the employer pays Class 1 secondary National Insurance at 15% on earnings above the £5,000 secondary threshold. That's 15% of £40,000, which is £6,000 of employer's NIC, before pension contributions. Your model needs that £6,000, or your runway is overstated. If you're sizing up your first hires, our payroll and statutory services team can help you cost them properly.
Worked example: a UK SaaS startup
Illustrative example. Northwind Analytics is a hypothetical pre-Series-A SaaS startup. It has just closed a small round and holds £900,000 in cash on 1 April. We'll model the first six months.
Its starting position:
- Monthly recurring revenue: £40,000 in month 1, growing roughly 10% a month
- Gross monthly costs: £115,000 (payroll, cloud, marketing, rent)
- Two engineers join in month 4 at a combined £9,000/month fully loaded cost
| Month | Revenue (£) | Costs (£) | Net burn (£) | Closing cash (£) |
|---|---|---|---|---|
| 1 | 40,000 | 115,000 | 75,000 | 825,000 |
| 2 | 44,000 | 115,000 | 71,000 | 754,000 |
| 3 | 48,400 | 115,000 | 66,600 | 687,400 |
| 4 | 53,240 | 124,000 | 70,760 | 616,640 |
| 5 | 58,564 | 124,000 | 65,436 | 551,204 |
| 6 | 64,420 | 124,000 | 59,580 | 491,624 |
Read it across. Net burn falls as revenue climbs, then ticks up in month 4 when the engineers land and costs rise to £124,000. By the end of month 6, closing cash is £491,624, and average net burn over the six months is about £68,000.
At that burn, the remaining £491,624 buys roughly another 7 months, so the cash-zero date sits around month 13. That's the moment the model is built to surface. It tells Northwind to open fundraising conversations now, in month 6 or 7, not when the runway is down to its last few weeks.
One tax point worth modelling once Northwind turns profitable. A UK company with profits up to £50,000 pays Corporation Tax at the small profits rate of 19% for the financial year starting April 2025, rising on a sliding scale via marginal relief up to the 25% main rate at £250,000 of profit. That tax is a real future cash outflow, so a mature model adds it in the months it falls due. Our corporation tax advisers can help you forecast that liability accurately.
How much runway should a startup keep?
The common rule of thumb is 12 to 18 months of runway. Below 6 months, fundraising gets noticeably harder and you may be forced into weak terms or rushed cuts.
The practical guidance from UK startup lenders is to start raising while you still have a comfortable cushion, often when you've 9 to 12 months left, because a funding round itself can take three to six months to close. Raising from a position of strength beats raising from desperation every time.
How much you actually need depends on your stage and how predictable your revenue is. A pre-revenue deep-tech startup with a long build cycle needs a longer buffer than a startup already growing recurring revenue. The model is what lets you set that buffer deliberately rather than guess.
How can you extend your runway?
Three levers, in rough order of how quickly they bite.
Grow cash revenue. Every extra pound of monthly revenue is a pound off your net burn, so it extends runway twice over. Faster collections and reducing churn count here too.
Cut or defer costs. Headcount is usually the biggest line, but software sprawl, premature senior hires and over-spent marketing are common culprits. Model the cut before you make it, so you can see exactly how many months it buys.
Bring in non-dilutive cash. UK startups have routes that don't cost equity. Loss-making, R&D-intensive SMEs may be able to claim a payable R&D tax credit on qualifying expenditure under HMRC's enhanced support, which for accounting periods beginning on or after 1 April 2024 is worth up to 14.5% of the surrenderable loss. Grants from bodies like Innovate UK are another option. These can meaningfully extend runway, but they take time and careful eligibility work, so model them conservatively and never bank on them before they land.
Want a model that connects your burn, your runway and your tax position? Zmartly's startup accountants and outsourced CFO team build founder-ready forecasts and keep them current. Book a free 20-minute call and we'll pressure-test your runway together.
Frequently asked questions
What's the difference between gross burn and net burn?
Gross burn is your total monthly cash spending before any income. Net burn is that spending minus your monthly cash revenue. Net burn is the figure that actually depletes your bank balance, so it's the one your runway is based on. Pre-revenue, the two are identical.
How do I calculate my startup's runway?
Divide the cash in your bank by your average monthly net burn. For example, £600,000 of cash and £50,000 net burn a month gives 12 months of runway. For accuracy, build a month-by-month model that includes planned hires and revenue growth, because a flat-burn snapshot can overstate how long you really have.
How much runway should a startup have before raising?
A common benchmark is 12 to 18 months of runway, and many founders start raising while they still have around 9 to 12 months left, because a round can take three to six months to close. Below 6 months, fundraising gets harder and terms tend to worsen.
Should burn rate use my profit-and-loss or my cash flow?
Use cash flow. Burn rate is about cash leaving the bank, not accounting profit. An invoice raised this month but paid in two months only affects your runway when the cash actually arrives, so always drive the model from real cash movements.
How often should I update my financial model?
Monthly, as soon as the previous month's bank figures are in. Compare actuals against your forecast, update the assumptions that were wrong, and re-check your cash-zero date. A model you refresh once a quarter drifts out of date fast for an early-stage business.
