Finance guide: Cash runway (calculation, uses, examples)

What is cash runway?

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Cash runway refers to the time a company can continue operating based on its current cash balance and burn rate. 

It is a critical metric for startups and early-stage companies that are not yet profitable because it indicates how long the company can continue operating before raising additional funding or becoming profitable. 

Monitoring cash runway is important to ensure a company does not run out of money unexpectedly. 

By monitoring this measure, startup founders can make necessary adjustments, such as reducing expenses or seeking new funding, before the company reaches the end of its runway. 

What is cash on hand?

Cash on hand refers to the physical cash, bank account balances, and other highly liquid assets that a business has readily available to cover immediate expenses and operations. 

This includes currency, coins, and money in checking/savings accounts that can be easily accessed and used for business purposes. 

Note that the company’s cash on hand does not include funds that the business cannot easily spend or access, such as the minimum deposit required to keep a bank account open or assets that can be sold.

Cash runway vs. burn rate

Burn rate refers to the rate at which a company is spending its cash, typically expressed on a monthly basis. There are two types of burn rate. 

Gross burn rate is the total amount of money spent on expenses like salaries, rent, marketing, etc. Net burn rate is the amount of cash spent after accounting for cash inflows. 

Much like cash runway, the burn rate is an important metric for startups and early-stage companies that are not yet profitable. 

Burn rate indicates how quickly they are using their available cash. Cash runway refers to the amount of time a company can continue operating based on its current cash balance and burn rate.

Positive cash runway vs. negative cash runway

Positive cash runway indicates the company has enough cash on hand to continue operating for a certain period of time, based on its current burn rate. Use the following formula as a template to track your cash runway:

Cash on Hand / Burn Rate = Months of Runway

A positive cash runway gives the company more time to become profitable, raise additional funding, or make necessary adjustments before running out of money. 

An optimal cash runway is generally around 12 to 18 months.

A negative cash runway indicates the company is spending more cash than it is bringing in each month, resulting in a negative cash flow. 

With a negative cash runway, the company is "burning" through its cash reserves. This is a dangerous situation for startups and early-stage companies that are not yet profitable because, if the situation does not improve, the company is projected to run out of money.

Business owners must pay attention to a negative cash runway and take immediate action, such as cutting costs, increasing revenue, or raising additional funding, to extend the company's runway and avoid being short of funds.

Types of runway cash flow

In some cases, founders and employees may need to use their personal cash reserves to supplement the company's runway. These are types of runway cash flow:

• Company cash runway: This refers to the cash runway calculated based on the company's current cash balance and burn rate. This is the primary cash runway metric that startups and early-stage companies track.

• Team cash runway: In extreme cases, founders and employees may need to tap into their own personal cash reserves to keep the company going if the company's cash runway is insufficient. 

• Founder cash runway: Founders may need to use their own personal cash reserves to support the company if the company's cash runway is running low. The founder cash runway is separate from the company's cash balance.

How to calculate cash runway

Cash runway is calculated by dividing a company's current cash balance by its monthly burn rate. Remember, the burn rate is the amount of cash the company is spending in excess of what it is bringing in each month. 

Cash runway formula

Cash Balance / Monthly Burn Rate = Cash Runway

For example, if a company has $200,000 in cash and a monthly burn rate of $15,000, its cash runway would be 13 months ($200,000 / $15,000 = 13 months). 

How to interpret cash runway

Interpreting cash runway is important because it provides valuable insights into a company's financial health, informs strategic decision-making, helps attract investors and venture capital groups, enables proactive planning, and is applicable across different business stages. 

What's a good cash runway?

Keeping an appropriate level of cash on hand, typically 12 to 18 months' worth of operating expenditures, is imperative for businesses to have funds available to cover costs during slow periods or unexpected events. 

Having sufficient cash on hand allows businesses to take advantage of investment opportunities that could help grow the business and pay for immediate expenses without waiting for financing or incurring debt.

The amount of cash a business has indicates its financial health and can influence how potential investors and partners view the company. 

How short is too short?

While there’s no universal threshold for cash runway, one of around 12 months is generally considered optimal for startups and early-stage companies. 

A cash runway that shrinks over time (indicating the company is spending more than it is bringing in) is a concerning sign that the runway may be getting too short. 

This is when startups and early-stage companies are advised to proactively manage their cash runway and take action before it gets dangerously low. Companies can cut costs, increase revenue, or raise additional funds.

Similarly,  a negative cash runway, where the company is spending more cash than it has, is a high-risk scenario that requires immediate action to avoid running out of money. 

Default dead vs. default alive

Default dead

The term “default dead” sounds alarming, and it is. A startup is considered "default dead" if it does not have sufficient cash to survive and maintain a healthy growth rate until it becomes profitable. 

Default dead startups are burning through their cash without showing signs of recovery with their current resources.

Default dead companies will need to raise additional investment to sustain operations because they are not on track to become profitable before running out of money. Startups in this situation have less leverage in fundraising. 

Why? Because they are dependent on investors to keep the business running. That’s why founders of default-dead startups may have to accept worse terms from investors. 

Default alive

This term is more reassuring. A startup is "default alive" if it is on a path or predicted to reach profitability based on its current expenses, growth, and resources without needing new investment. 

Default-alive startups do not necessarily need to raise more funding to survive. Because they are in a good financial position, they can be more selective and negotiate better terms with investors. 

Maintaining a default alive status is especially important during economic downturns when fundraising may be more challenging.

Founders of default-alive startups can focus on evolving the product and growth rather than solely on raising more money to stay afloat. 

Cash runway calculation examples

Let’s review the steps to determine the cash runway.

1. Determine the company's current cash balance
2. Calculate the monthly net burn rate (expenses minus revenue).
3. Divide the current cash balance by the monthly net burn rate to get the cash runway in months.

Startup cash runway calculation example

Let's say the startup has a current cash balance of $500,000 and a monthly burn rate (net cash outflows) of $25,000

To calculate the startup's cash runway:

1. Determine the current cash balance: $500,000.

2. Calculate the monthly burn rate (the total cash spent in a month minus any incoming revenue): $25,000.

3. Divide the current cash balance by the monthly burn rate: $500,000 / $25,000 = 20 months.

Based on the current cash balance of $500,000 and a monthly burn rate of $25,000, this startup has approximately 20 months of cash runway before running out of money, assuming the burn rate does not change.

SaaS cash runway calculation example

A Saas company is a software provider that delivers its applications to customers over the internet through a subscription-based model rather than selling packaged software. Let’s review a SaaS cash runway example.

Let's say the SaaS startup has:

- Current cash balance: $1,000,000

- Average monthly gross burn rate (total expenses): $45,000

- Average monthly revenue: $12,000

To calculate the startup's cash runway:

1. Determine the current cash balance: $1,000,000

2. Calculate the average monthly net burn rate:

Net Burn Rate = Gross Burn Rate - Average Monthly Revenue

3.    Net burn rate = $45,000 - $12,000 = $33,000

Divide the current cash balance by the average monthly net burn rate:

4.    Cash runway = $1,000,000 / $33,000 = 30 months

Based on the current cash balance of $1,000,000 and an average monthly net burn rate of $33,000 (gross burn of $45,000 minus $12,000 in average monthly revenue), this SaaS startup has approximately 30 months of cash runway before running out of money, assuming there will be no changes to the burn rate or revenue.

How to improve a startup runway

As the founder, you will have to make difficult decisions. Do not be afraid to act methodically and strategically to improve your startup’s runway. Having real-time cash runway data can help startups take action. Here are some examples.

Reduce expenses

Focus on reducing the startup's burn rate, which is the net cash outflow each month. Cut costs by reducing headcount or office space, renegotiating vendor contracts, eliminating unnecessary spending, and paying off the company’s credit cards in full every month. 

Increase revenue

Revisit your business model. Is the company meeting its KPIs? Raise prices and monetize existing assets to generate more cash inflow. Acquire more customers, improve sales and marketing strategies, and create recurring revenue streams.

Raise more funding

Pitch to investors and secure additional capital, equity, or debt financing. Also explore alternative funding sources, such as grants, loans, or revenue-based financing.

Liquidate non-core inventory

Sell excess inventory or assets that are not essential to the core business.

Improve your AR and AP timelines

Reduce the time it takes to collect customer payments and make payments to vendors to improve your accounts receivable (AR) and accounts payable (AP) processes.

How successful CEOs and investors use cash runway

Successful CEOs and investors closely monitor a company's cash runway to make informed decisions about fundraising, identify areas for improvement, build investor confidence, and time major investments. 

To reiterate, the cash runway metric provides valuable insights into the company's financial health and runway for growth.

Determine when you need to raise another round of funding

Use the cash runway calculation to proactively plan for the next fundraising round, ensuring you have enough time to secure new funding before the current runway expires. 

Remember, investors closely monitor a startup's cash runway. A company with a shorter cash runway has less leverage to negotiate with investors.

Highlight inefficiencies

Cash runway is a great barometer to highlight inefficiencies. A shrinking cash runway over time can be an early warning sign that the business is spending more than bringing in, prompting the need to take corrective action. 

Founders and CFOs can use this metric to identify areas where the company is overspending and make adjustments to extend the runway (such as reducing expenses or increasing revenue, as we’ve stated in the previous section).

Instill confidence in investors

Investors view a healthy cash runway as a sign of the company's financial stability and ability to execute its growth plans. 

Founders can use the cash runway calculation to demonstrate to investors that the company has sufficient funding to reach key milestones, making it more attractive for investment.

Know when you make big investments

A strong cash runway gives companies more flexibility to invest in growth opportunities, such as hiring, marketing, or product development, without the immediate pressure of running out of money.

How do you calculate cash runway?

Divide the current cash balance by the monthly burn rate to calculate the cash runway. 

Cash Runway = Current Cash Balance / Monthly Net Burn Rate

Remember, the monthly net burn rate calculation is: 

Monthly Net Burn Rate = Gross Burn Rate - Average Monthly Revenue

What is a good cash runway?

When it comes to cash runway, there is no one-size-fits-all. Generally, a 12-18 month cash runway is optimal for startups and early-stage companies. 

What is the meaning of cash runway?

Cash runway refers to the length of time a company can continue operating based on its current cash balance and burn rate.

What is the difference between cash burn and cash runway?

Even though they are closely related metrics, cash runway and cash burn (also called the burn rate) do not measure the same thing. Let’s first review the cash burn. 

The cash burn (or burn rate) refers to the rate at which a company is spending its cash, typically expressed monthly. Cash burn does not directly measure time but rather the amount of cash being spent over a given period (e.g., $40,000 per month).

Cash runway refers to the time a company can continue operating based on its current cash balance and cash burn (burn rate). It is calculated by dividing the company's current cash balance by its monthly net burn rate and expressed in months. 

To recap, cash burn (also known as burn rate) measures the amount of cash being spent, but not the duration. Cash runway measures the duration (in months) a company can continue operating based on its current cash balance and burn rate.

The two metrics are closely linked, but they represent different aspects of a company's financial situation and are used for different purposes. 

Tracking burn rate is used to assess expenses and make spending and cutting decisions, while measuring cash runway measures the amount of time a company can continue operating with its current expenses and income. 

What does “extend cash runway” mean?

"Extending cash runway" refers to taking actions to increase the time a company can continue operating before running out of cash and getting to positive cash flow.

What is cash runway rate?

The "cash runway rate" refers to the burn rate or the rate at which a company spends its cash, which is a key input for determining its cash runway. Monitoring both the burn rate and cash runway is essential for startups to manage their finances and plan for the future.

What is a healthy cash position?

A healthy cash position for a startup or small business is typically characterized by a 12-18 month cash runway, a controlled burn rate, efficient financial management practices, and the ability to weather unexpected challenges. 

Maintaining this level of financial health is crucial for a startup's long-term success and growth.

How do you calculate cash burn per month?

The formula for calculating the monthly cash burn rate is:

Monthly Cash Burn = (Beginning Cash Balance - Ending Cash Balance) / Number of Months

How much cash should I sit on?

Startups should aim to have 12-18 months of cash runway, or enough money or cash reserves to cover 12-18 months of operating expenses, to provide a healthy financial cushion and runway for growth. 

This allows startups to weather challenges, take advantage of opportunities, and have more control over their financial future.

Conclusion: Extend your runway with Rho

As a founder, your cash runway is your startup’s lifeline. It provides a rough timeframe of when you should begin your next fundraising round and can help you understand if you should consider reducing your burn rate. 

Fortunately, you can take steps today to extend your cash runway without raising significantly more money. For example, you can invest your non-operating funds in T-Bills through Rho Treasury, earning competitive yields in U.S. government-backed securities.

Want to learn more about Rho’s business banking platform and cash management services? Sign up for a demo today.