Most seed-stage founders check two numbers every week: cash in the bank and monthly burn. Runway is just one divided by the other. The problem is that on a lot of early-stage books, the burn number is quietly wrong, and nobody notices until an investor's diligence team rebuilds it.
If you've ever had your runway jump by three months after an annual prepayment landed, or drop sharply because two months of contractor invoices hit at once, this post is for you.
Why cash-basis books mislead startups
Early on, most startups keep books on a cash basis: revenue is recorded when money arrives and expenses when money leaves. It's simple, and for a while it's fine. Then the business gets slightly more complicated and the numbers start lying:
- Annual contracts. A customer prepays $60k for a year. Cash-basis books show a $60k month and eleven $0 months. Your revenue growth chart becomes noise.
- Annual software and insurance. One big payment makes that month's burn look terrible and the next eleven look better than reality.
- Contractors and agencies who invoice late. The work happened in March, the invoice arrives in May. March looks cheap; May looks like a crisis.
- Payroll timing. A month with three pay dates looks 50% more expensive than one with two.
- Founder-paid expenses reimbursed in batches, which shift costs into whatever month someone got around to it.
Each one distorts burn. Together, they make the runway figure in your board deck a guess.
What accrual books fix
Accrual accounting records revenue when it's earned and expenses when they're incurred, regardless of when the cash moves. That annual prepayment becomes $5k of revenue each month plus a deferred-revenue balance. The annual software bill is spread across twelve months. The March contractor work lands in March.
You still track cash separately, and you should. But now you have two honest numbers: what the business actually costs to run each month (accrual burn) and what's happening in the bank (cash burn). The gap between them tells you about timing, collections and prepayments, which is exactly what investors ask about.
A minimal setup that holds up in diligence
- Close the books every month, within about two weeks of month-end.
- Reconcile every bank and card account monthly.
- Track deferred revenue for anything billed in advance, and accrue for work done but not yet invoiced.
- Code payroll and contractors by department so you can see what engineering, sales and G&A really cost.
- Keep a rolling 13-week cash forecast next to the accrual P&L.
- Make sure the metrics in your deck (ARR, burn, gross margin) tie back to the financials. Mismatches are the first thing a diligence team flags.
None of this requires a full-time finance team. It requires someone owning the close every month.
How River Edge helps
River Edge Advisors is a CPA-led outsourced accounting and fractional CFO firm with a team of 75+. For startups from seed to Series B, we run the whole finance function: bookkeeping on an accrual basis, payroll, AP and AR, a monthly close, and a fractional CFO who builds the model, the cash forecast and the board and investor package. As one example of what that setup makes possible, an SPV we support runs its accounting and reporting with zero internal finance hires.
Start with last month
If you're not sure your burn number would survive diligence, send us last month's books. We'll review them for free and tell you what we'd fix first.
Request a free review of last month's books
Mendy Reich, CPA, is Principal of River Edge Advisors, a CPA-led outsourced accounting and fractional CFO firm (www.riveredgeadvisors.com).
Top comments (0)