By Shawn Elliott, CFO | High Rock Accounting
So here is a scenario I see more than I should. A pre-commercial biotech or pharma company heads into a board meeting or investor call with a clean income statement, a tidy total burn number, and a confident founder who has done a genuinely good job managing cash. And then someone around the table asks, ‘What percentage of your burn is R&D versus G&A?’ And the room goes quiet.
That question is not a gotcha. It is one of the most basic things a sophisticated investor, a lead VC, or a biotech-focused family office wants to understand before they write another check. And the fact that so many pre-commercial teams cannot answer it in real time, without digging through spreadsheets, tells me something is off in how the books are structured.
This is not a complicated concept. But getting it right, consistently, in a way that holds up to investor scrutiny, requires more intentionality than most founding teams realize. Let me walk through what investors are actually looking at, why the split matters, and what I see companies getting wrong on a pretty regular basis.
Why Investors Care So Much About This Split
When you are pre-commercial, you are not being valued on revenue. You are being valued on your pipeline, your science, and your ability to deploy capital efficiently toward the milestones that will move the needle, whether that is an IND filing, Phase I completion, FDA clearance, or a 510(k) submission.
R&D expense in this context is mission-critical spend. It is what moves the asset forward. G&A is overhead, the legal, finance, HR, and administrative infrastructure that supports the business but does not directly advance the program. Investors want to see that the majority of your burn is going toward the work, not toward keeping the lights on. For early-stage pre-commercial biotechs, the general expectation from investors is that R&D should represent somewhere in the range of 60 to 80 percent of total operating expenses, though that range shifts depending on stage, headcount, and whether you are running your own trials or using a CRO model. *1
If your G&A is eating 50 cents of every dollar you spend, that is a story you need to be able to tell. Maybe you just brought on a VP of Finance to prepare for a Series B. Maybe you are in the middle of a system implementation. Context matters. But you need to know the number, you need to be able to present it clearly, and you need to understand what it signals before someone else interprets it for you.
There is also a practical modeling reason for this. Investors and their financial analysts are building runway models that try to project how far your current cash takes you. If they cannot separate R&D from G&A, they cannot stress-test what happens if you accelerate or deprioritize a program. A lumped-together burn number gives them nothing to work with.
The Three Most Common Mistakes I See
When I come into a pre-commercial healthcare or biotech company for the first time and start looking at the books, I pretty reliably find one or more of the same issues. Here is what trips most teams up.
Mistake 1: Everything Is in One Bucket
This one is almost universal at the earliest stages. The company has been moving fast, the bookkeeper has been keeping up with cash flow and payables, and the chart of accounts just has a general ‘operating expenses’ category or maybe a handful of catch-all accounts. R&D and G&A are not separated at all.
This is understandable when you are a three-person team spending $80,000 a month. But the moment you take institutional money, the expectation changes. Your investors are used to seeing R&D and G&A broken out on the face of the income statement, and they will assume you have that infrastructure in place. If you do not, it creates a credibility gap.
The fix is not complicated. You need a chart of accounts in Sage Intacct or whatever system you are running that separates your expense categories clearly, and you need a consistent policy for where things go. But the policy piece is where most teams underestimate the work.
Mistake 2: Misclassifying Shared Costs, Especially Payroll
Payroll is almost always the biggest line item in a pre-commercial company, and it is almost always the most complicated one to classify. A lot of founders lump everyone into G&A by default because that feels like the safe choice. But if your VP of Regulatory Affairs spends 90 percent of their time on your IND submission, that salary belongs in R&D. Under ASC 730, research and development costs are defined as activities that meet specific criteria around the discovery of new knowledge and the translation of that knowledge into a new product or process, and the compensation of personnel directly engaged in those activities qualifies. *2
The problem is that most pre-commercial companies have not thought through the allocation. They have a scientist who does a little bit of everything, a regulatory person who also handles some compliance work, and a CEO who is spending 40 percent of their time on science-related activities and 60 percent on investor meetings and operations. You need a methodology for figuring out how to split that payroll, and you need to document it.
The approach I typically recommend is a time-based allocation, where each person’s role and time allocation is reviewed periodically and documented, with payroll split accordingly across R&D and G&A. It does not have to be exact to the hour. It has to be reasonable, consistent, and defensible. If your auditors or your lead investor asks why the CEO’s compensation is split 40/60, you want a written rationale sitting in your files, not a guess.
Mistake 3: Clinical Trial Expenses Are Either Missing or Misallocated
This is the one that really gets pre-commercial companies into trouble at later stages. Clinical trial expenses, whether you are paying a CRO, covering site costs, managing patient stipends, or buying investigational product, are R&D costs. Under GAAP, you recognize these on an accrual basis, meaning you need to estimate and record the expense as services are performed, not when invoices arrive. For a Phase I trial, that could mean recognizing costs over 12 to 18 months across a process that involves patient enrollment, dosing, monitoring, and data collection, all of which have to be accrued as they happen. *3
A lot of pre-commercial companies are running mostly on a cash or near-cash basis for their trial expenses because their bookkeeper or part-time controller does not have the bandwidth or the expertise to manage the accrual properly. So you end up with expenses hitting the income statement in lumps when invoices come in, rather than smoothed out over the performance of the underlying work. That makes your monthly burn look erratic and your R&D spend unpredictable, which is exactly what you do not want an investor looking at.
Getting this right requires working closely with your CRO and your clinical team to build a detailed timeline of expected milestones and associated costs, and then building an accrual schedule that maps spend to activity. It is more work on the front end. But it makes your financials a lot cleaner and your investor conversations a lot smoother.
What the Dashboard Should Actually Look Like
When I build out a financial reporting package for a pre-commercial biotech or pharma client, the burn analysis section is not just a single number. Here is the level of detail that actually serves a board or investor audience well.
First, you want total burn broken out by R&D and G&A, shown for the current month, year-to-date, and ideally compared to budget. That budget comparison matters because it lets you explain variances in real time rather than getting caught flat-footed when someone asks why R&D spend was up 30 percent last month.
Second, within R&D, you want visibility by program or by activity. If you have multiple compounds or device programs, what is going to each? If you have a single program, what portion is clinical, what is preclinical or manufacturing, and what is regulatory? This lets your scientific advisory board and your investors see the burn from a strategic lens, not just an accounting lens.
Third, within G&A, you want the usual breakdown, compensation, professional fees, facilities, insurance, and general admin, because this is where inefficiency hides. If your G&A is growing faster than your headcount or your clinical activity, that is a conversation you want to be having proactively.
Fourth, and this is the piece that a lot of companies skip, you want a trailing runway calculation that uses the R&D and G&A split to model different scenarios. What happens to your runway if you accelerate enrollment and R&D spend goes up 25 percent? What if you defer a regulatory filing and G&A drops 10 percent? Those scenario outputs are what sophisticated investors are actually going to push you on, and you want to own that conversation rather than scrambling to rebuild the model in real time. *4
A Word on System Setup
None of this works without the right accounting infrastructure. I work with Sage Intacct for most of my pre-commercial healthcare and pharma clients because it handles dimensional accounting well, meaning you can tag transactions with multiple attributes, a department, a program, a grant, a phase, without having to multiply your chart of accounts endlessly. That flexibility makes it much easier to produce the kind of segmented reporting I am describing here without creating a bookkeeping nightmare.
On the expense and card side, I typically see Ramp or Brex being used for corporate card spend, which is fine as long as you are building the integration and approval workflows so that expenses are hitting the right GL accounts in real time and not being cleaned up manually every month. And for payroll, ADP and Paychex both handle the kind of multi-cost-center payroll allocation you need for a company where you are splitting wages across R&D and G&A. Getting that allocation baked into the payroll system itself is much cleaner than trying to do journal entries after the fact every month.
The goal is to build a close process where the R&D versus G&A split is clean and defensible by the time the books close, not something that gets figured out in a spreadsheet the night before a board meeting.
The Bigger Picture
I want to be direct about something. Getting your R&D versus G&A split right is not just a financial reporting exercise. It is an investor confidence signal. When a pre-commercial company can walk into a board meeting and say, here is our total burn, here is what is going to the science, here is what is going to overhead, and here is how that compares to budget and to prior periods, it communicates something important. It tells your investors that you are managing capital with the same rigor they expect from the science itself.
The companies that struggle with this, where the answer to ‘what is your R&D burn?’ is ‘let me get back to you on that,’ those companies are working harder than they need to in every investor conversation. And they are usually surprised when their investors start asking harder questions about capital efficiency as they get closer to the next round.
Getting the books squeaky clean on this split takes some work up front. But once the infrastructure is in place, it becomes routine, and the payoff in board-ready reporting is significant. If you are a pre-commercial biotech or pharma founder and this is an area where your books need attention, it is a good time to take a hard look before the next round of diligence starts.
Sources
*1 BIO / Deloitte, Measuring the Return from Pharmaceutical Innovation (annual benchmarking series); SVB Healthcare report on pre-commercial biotech operating expense benchmarks.
*2 FASB ASC 730, Research and Development — authoritative guidance on what constitutes R&D and how personnel costs should be classified.
*3 FASB ASC 730-10-25 and SEC Staff Accounting Bulletins on accrual of CRO and clinical trial costs; PricewaterhouseCoopers, Pharmaceutical and Life Sciences Industry Accounting Guide.
*4 National Venture Capital Association (NVCA), Venture Monitor; investor diligence practices and financial reporting standards for pre-commercial life sciences companies.
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