Runway is the amount of time, in months, a business has before it runs out of cash. For companies growing through venture capital, it’s an at-a-glance metric that shows the number of months you have left before your cash balance hits $0. While you may see people talking about different types of cash runway — company cash, team cash, and founder cash
What does Cash Runway mean in Business?
Cash runway indicates how long a startup can sustain its operations at the current spending rate before exhausting its available cash. For startups not yet generating income, the cash runway is calculated by dividing the total available cash by the total monthly expenses. Available cash refers to funds that are immediately accessible or can be accessed within a reasonable time frame to cover expenses. This calculation should not include anticipated fundraising or other uncertain capital infusions.
Why is cash runway important?
A startup’s cash runway is an important component of budgeting, strategizing, forecasting and fundraising efforts. For founders, it is essential to have the most up-to-date information, which requires regularly updating and recalculating the cash runway. Understanding the current cash runway and its historical trends is vital for balancing a startup’s growth ambitions with financial stability and aligning management’s expectations with reality.
Calculating cash runway
- Decide on the time period: A typical time frame used is monthly. However, to avoid any unusual cash inflows or outflows, a quarterly or annual period is sometimes used.
- Determine current cash balance: This is the total amount of cash the startup has on hand, including cash in bank accounts and any other liquid assets that can be converted to cash within a reasonable period of time (typically 30 days).
- Calculate expenses: Sum up all expenses, including payroll, rent, utilities, marketing, R&D, insurance and taxes, and convert to a monthly amount.
- Calculate revenue: Determine the total monthly revenue. This includes all income generated from sales, services or any other sources.
- Find the cash burn rate: This is the difference between monthly expenses and monthly revenue.
- Find the cash runway: Divide the current cash balance by the net burn rate.
Net Burn Rate = Monthly Cash Expenses – Monthly Cash Revenue
Cash Runway = Current Cash Balance / Net Burn Rate
FAQs
How much cash runway is enough?
A variety of factors influence the length of a startup’s required cash runway. These include the stage of the startup, its capital requirements, the industry it operates in, its business model and its existing investors, among others. For instance, a startup that is still in the process of developing its solution, such as creating a minimum viable product (MVP) or testing product-market fit, typically requires a longer cash runway compared to one that already has a developed product and paying customers. Additionally, the type of milestones a startup needs to achieve before raising additional funds plays a crucial role. Some milestones may depend on developing new technology, navigating third-party processes like securing government contracts, or achieving unpredictable outcomes such as obtaining FDA approval. Startups facing milestones that are more challenging or uncertain should consider extending their cash runway buffer to accommodate these potential hurdles.
When the venture capital market is less active, founders should allocate more time to secure a new round of financing than when the market is thriving. Understanding the size of deals similar startups are raising can help ensure that one round secures sufficient capital to provide an adequate runway. The composition of investors also influences runway requirements. Additionally, the types of existing investors are important. For instance, a startup primarily backed by seed-stage investors that is planning to raise a Series A round will likely need to identify a new investor to lead the round.
Extending cash runway?
Startups can extend their runway through three main strategies: increasing revenues, reducing operating expenses or raising additional capital. To manage operating expenses, startups might focus on areas such as staffing, office space and infrastructure costs. On the capital front, many companies consider venture debt alongside equity financing to extend their runway. As part of financial planning and forecasting, startups should calculate, model and test various scenarios, each based on different combinations of these strategies. By creating and evaluating these forecasting models, startups can gain insights into the potential runway range each scenario might provide.