Forecasting Biotech Burn Rate: Include Clinical Trial Accruals to Predict Runway

The Hidden Liability: Understanding the Clinical Trial Accrual Gap

Your company’s bank balance looks healthy, yet a sense of unease lingers. You know significant clinical trial expenses are out there, but the invoices have not arrived. This disconnect between cash on hand and true financial obligations is caused by the clinical trial accrual gap, a period where work is completed and costs are incurred, but the corresponding bills are weeks or even months away. Ignoring this gap means your biotech cash flow forecast is not a forecast at all; it is a rearview mirror.

A clinical trial accrual is an estimate of an expense your company has incurred for services performed but has not yet been invoiced for. The need for this estimate stems from a simple operational reality. The industry standard delay between a patient visit and a consolidated invoice from a CRO or clinical site can be anywhere from 30 to 90 days or more. During this lag, your company accumulates liabilities that are invisible on a simple cash-basis report, creating a distorted view of your financial health.

The financial impact of this delay is substantial. For a trial spending $500,000 per month, a 90-day lag can create a hidden liability of $1.5 million. This 'hidden' liability is a primary cause of cash surprises that can suddenly shorten your runway and force difficult conversations with your board and investors. This is why accurately forecasting clinical spend requires you to bridge this gap by systematically tracking work performed, not just invoices paid. Understanding your accruals is fundamental to effective biotech cash flow management.

This is not just an accounting exercise. Recognizing expenses as they are incurred is a core principle of standard accounting practices. For US companies, this aligns with US GAAP principles for R&D expense recognition. Similarly, companies in the UK must adhere to FRS 102 principles. By building a reliable accrual process, you not only enable better biotech financial planning but also ensure your books are compliant and reflect the true economic activity of your business.

How to Include Clinical Trial Accruals in Your Biotech Cash Flow Forecast: A 3-Part Guide

Building a reliable accrual model is a systematic process of gathering data, calculating your current position, and projecting it forward. For most Series A and B startups, this process will begin in Excel or Google Sheets, which are perfectly acceptable starting points. The key is establishing a consistent, repeatable process.

Part 1: Gathering the Raw Materials for Your Accrual Model

To build an accurate estimate, you need to systematically gather data from three primary sources. This data provides the inputs for your financial model and ensures it is grounded in operational reality.

1. Vendor Contracts and Statements of Work (SOWs). While a Master Service Agreement (MSA) sets high-level terms, the SOW contains the financial details essential for your model. Systematically extract the unit costs for specific activities (e.g., cost per patient visit, per sample analysis) and the payment schedule for fixed trial milestone payments (e.g., site activation, database lock). Using detailed SOWs is the foundation of accurate clinical trial budgeting.
2. Clinical Operations Activity Data. This is the non-financial data that signals when work has been performed and when a cost has been incurred. Key metrics include patient enrollment dates, the number and type of patient visits completed each month, sites activated, and samples processed. Collaboration between finance and clinical operations is essential for getting timely, accurate activity data. The strongest financial models are always built on this partnership.
3. Invoice and Payment Records. Finally, you need a complete record of all invoices received and payments made to each vendor. This information, typically housed in your accounting software like QuickBooks or Xero, represents the portion of your liability that has been formally billed. This data is used to reduce your estimated accrual, ensuring you do not double-count expenses.

Part 2: Building Your First Accrual Estimate

With your raw materials gathered, you can construct your monthly accrual estimate. The goal is to translate raw activity data into a reliable financial figure. The core calculation is straightforward: (Units of Work Completed × Cost per Unit) – Invoices Paid = Month-End Accrual. What founders find actually works is starting with a simple model for your highest-spend vendors, typically your main CRO.

Your first model will live in a spreadsheet. In it, you will track the units of work, apply the costs from the SOW, and subtract any invoices received for that work. For example, consider a simple scenario for a CRO managing patient visits at a cost of $5,000 per visit.

In January, 10 patient visits are completed. This means you have incurred $50,000 in expenses (10 visits × $5,000). Since no invoices have arrived yet, your cumulative accrual is $50,000. In February, 15 more visits occur, adding $75,000 in new expenses. Still with no invoices, your total hidden liability grows to $125,000. In March, 20 visits add another $100,000 of incurred expense. That month, you finally receive a $50,000 invoice for January's work. While your cash outflow is $50,000, your total accrued liability is now $175,000 ($125,000 from before + $100,000 for March – $50,000 invoiced). By April, your accrual has grown to $200,000. This model directly quantifies your month-end liabilities even when vendor data is slow to arrive. An estimate based on activity is better than waiting three months to understand your financial position.

For fixed milestone payments, the approach is similar but simpler. The full value of the milestone is accrued in the month the milestone is achieved, regardless of when the invoice is sent or paid. If a $200,000 site activation milestone is hit in May, the entire $200,000 is recognized as an incurred expense in that month.

Part 3: From a Monthly Estimate to a Rolling Forecast

Your monthly accrual calculation provides a clear picture of your past and present obligations. The next step is to use this model for biotech runway planning by projecting your cash needs for the next 12 to 18 months. This process transforms your accrual model from a historical accounting tool into a powerful forecasting engine for managing R&D expenses.

First, create an expense forecast by extending your accrual model into the future. You will use projected activity data from your clinical team, including enrollment forecasts, the expected number of patient visits per month, and the anticipated timing of major trial milestones. By applying the unit costs and milestone values from your SOWs to these projections, you can build a month-by-month forecast of your incurred R&D expenses.

However, an expense forecast is not a cash forecast. To manage your bank balance, you must then layer in the expected payment lag. If your CRO typically invoices 60 days after the work is performed and your payment terms are 30 days, you should forecast the cash outflow to occur 90 days after the expense is incurred. This critical step translates your accrual-based expense view into a cash-based outflow view, which is essential for true biotech cash flow management.

For companies with trials in multiple countries, this process is complicated by currency fluctuations. A significant challenge is translating commitments in EUR or GBP back into a USD cash flow forecast. To manage this risk, apply a conservative Foreign Exchange (FX) rate, such as one 5-10% worse than the current spot rate, to create a buffer in your cash forecasts. This buffer helps protect your runway from adverse currency movements.

The Strategic Impact of an Accurate Accrual Process

Implementing a clinical trial accrual process is a foundational step in achieving financial control and predictability. It allows you to move from a reactive, cash-based view to a proactive one, giving you, your board, and your investors confidence in your financial stewardship. The accrual model is your primary mechanism for forward-looking financial management.

The process can be broken down into a few manageable steps:

1. Centralize Contracts. Gather all vendor SOWs and create a summary of key financial terms, unit costs, and milestone payments.
2. Establish Data Flow. Work with your clinical operations team to establish a simple, repeatable process for getting monthly activity data.
3. Build the Model. Start your initial model in a spreadsheet, focusing first on your top one to three highest-spend vendors.
4. Forecast and Iterate. Update the model monthly with actual data and use it as the basis for a rolling 12-18 month cash flow forecast.

As your company matures, this detailed tracking of R&D expenses becomes critical for other financial activities. It simplifies cost modeling for protocol amendments and provides robust support during investor due diligence. Furthermore, meticulous records are essential for tax planning and compliance. For US companies, understanding the precise timing of these expenses is relevant under the rules for R&D expense capitalization (Section 174). For those in the UK, these records are crucial for meeting the criteria for R&D tax relief claims. Your accrual model provides the detailed, contemporaneous evidence needed for these programs.

While a tool like Excel or Google Sheets is sufficient to start, almost every biotech reaches a point where the complexity of multiple trials, vendors, and currencies makes a spreadsheet unwieldy. This is the natural trigger to consider specialized software that can automate data integration and forecasting. The goal remains the same: to create a single source of truth for your clinical trial liabilities and build a forecast you can trust.