Cash runway and burn rate go hand-in-hand. In fact, your burn rate is required to calculate your runway. So if you’re not familiar with burn rate, start there.
In short, cash runway is the amount of time you can operate at a loss before running out of money. If you’re burning through $10,000 a month and have $60,000 in the bank, you have six months before you’re in serious trouble. Sounds simple, right?
The overall formula certainly is. Here is how you can calculate your runway:
Cash Runway = Cash Balance / Burn Rate
Why is Calculating Cash Runway Important?
Your cash runway gives you insight into your business’ profitability and can tell you if you’re overspending. If your cash runway keeps shrinking, that’s not a good sign and should signal you to cut back on expenses or find a way of generating more revenue.
Cash runway is particularly important for startups who have received funding to monitor closely. In most cases, startups are not immediately profitable and expect to burn through their funding over a specified period of time when they’ll either expect to start turning a profit or seek another round of funding.
While there’s a more urgent need for startups to keep a close watch on this metric, all companies can gain something from it, particularly in leaner times. When you fail to meet your budgeted goals or the economy has taken a downturn, monitoring your cash runway will help put the urgency of the situation into context. Do you need to impose a hiring freeze and cut back on spending right away? Or can you simply tighten up spending a little and see if other initiatives can help right the ship?
When you regularly check in on cash runway, you’ll be better able to determine a runway you feel comfortable with. If your business is highly seasonal, you may be okay with a tighter-than-normal runway in your slow season. If your business is incredibly consistent, runway can be the first step to identifying progress or letting you know if you’ve got enough that you can reinvest some money in a larger initiative.
3 Types of Cash
On the surface, cash runway sounds simple. But in order to get the most out of that calculation, it’s important to understand that there are three different ways to think about this metric. While your business accounts may be dwindling, you as the founder may be able to keep the company going longer using your own cash reserves. Here are a few more ways to splice and dice your cash runway.
- Company Cash: Does your company have enough money to pay all of its expenses?
- Team Cash: Do you have enough cash to pay employees? Can you offer equity or non-cash incentives if you need to?
- Founder Cash: How long can you personally operate at a loss?
Ideally, shouldn’t need to tap into team cash or founder cash. When you keep watch over your cash runway, you will hopefully be able to implement changes in your business before resorting to those measures.