When startups raise capital from investors to fund their company, how do they work out how much cash they can afford to spend each month? And how do they know when the money in their bank account will run dry?
There’s a metric that all startup founders (and many startup operators) should be keeping a close eye on; in this post, we’ll share everything you need to know about cash runway.
Cash runway is a crucial metric for startups to track because it tells you how many months you have until your bank account hits zero. (For more information on the speed at which startups burn through cash, see our post on burn rate.) Runway is gaining in importance as a metric because companies need to conserve as much cash as possible to ride out what is expected to be a difficult couple of years for fundraising. Because of that, the standards for what is considered a “good” cash runway are also changing.
Below, we’ll get into more detail on what cash runway is, why it’s important, and how to calculate it.
Cash runway is the amount of time you have until your business runs out of money. In a nutshell, it’s the length of time a company has until the music stops. Cash runway is usually referred to on a monthly basis (i.e. “We have 18 months of runway left”), though you can talk about it on an annual basis as well.
Early-stage companies are unlikely to turn a profit until they reach a point of maturity. Some business models, such as SaaS, require a hefty up-front injection of cash so you can hire a team, build a product, and market the business to potential customers. Such companies will hope to generate a return on that initial investment over time, but it can take years before the cash flows in.
In the meantime, these companies rely on funding from investors to stay afloat, with the promise of payback in future. If you start burning through the cash too quickly, you may reach the end of your runway — which is why understanding and managing your cash runway becomes crucial for startups.
You can’t compute a cash runway without first knowing your burn rate, as the two concepts are closely related. Burn rate is the amount of money you’re losing every month, if your company is unprofitable.
Burn rate is calculated by subtracting money flowing into a bank account from cash that’s flowing out of it. For instance, if a company was spending $150,000 each month but generated $50,000 in revenue that same month, the burn rate would be $100,000.
Cash leaving your bank account - cash entering your bank account = monthly burn rate
Once you know your burn rate, there’s a “back of the envelope” way to work out your cash runway. For example, if a company has $1M in the bank and burns $100K a month, its cash runway would be 10 months, unless it found a way to generate more revenue, lower costs, or raise further funding.
Total cash in bank ÷ monthly burn rate = cash runway (in months)
Depending on the economic climate, you likely need at least 24 to 36 months of runway in the bank as a cash buffer.
To start tracking your monthly burn rate and cash runway, use our cash burn template.
Cash runway is a closely tracked metric for business owners, their investors, and other stakeholders. That’s because it sheds light on the strength of a company’s finances. If you don’t track your runway, you could easily run out of money.
This becomes an issue of life or death for a startup. As Paul Graham states: “assuming [your] expenses remain constant and [your] revenue growth is what it has been over the last several months, do [you] make it to profitability on the money they have left? Or to put it more dramatically, by default do [you] live or die?”¹
By monitoring your cash runway on a monthly basis, you can track whether you’re spending your capital faster (or slower) than you intended, and adjust your course while there’s still time. That way, you give yourself the best shot of hitting your next milestone — whether that’s raising another round of funding, or reaching profitability.
The equation we provided above is a quick way of calculating your cash runway: you know how much money you have in the bank today and how much money you’re losing this month, and extrapolate that into the future. However, what if that changes over time?
As venture capitalist Fred Wilson warns, “Assuming a constant burn rate can be very dangerous. Always know if your burn rate is going up or down and include that fact in your analysis.”²
To prepare for the future, it’s helpful to understand how your cash runway will trend over time. Your cash runway might be 36 months today, but imagine that you hire several new employees and increase your marketing spend, while your revenue stays flat. Your cash runway next month might only be 24 months.
Because of this dynamic, it can be helpful to forecast your cash runway over time to prevent any nasty surprises. If you expect that your revenues or costs might change, a forecasted monthly burn rate and cash runway can be a more precise indicator of how your company’s position will evolve over time.
When forecasting your monthly burn rate — and as a result, your cash runway — here are some line items to include in your forecast:
(If these line items are growing, they’re reducing your monthly burn rate, and extending your cash runway.)
Revenue: Do you expect revenue to grow over time — and if so, how quickly? It’s good to account for any planned revenue growth in your forecast on a monthly basis, as increases in revenue will help extend your cash runway.
(If these line items are growing, they’re increasing your monthly burn rate, and cutting your cash runway.)
Cost of goods sold: How do you expect your COGS to change over time? For software businesses, this could include the cost of web hosting through a provider like Amazon Web Services (AWS). For e-commerce businesses, this could include the cost to produce the physical goods you’re selling.
Headcount: Do you expect your headcount to go up over time, or salaries to increase? Healthcare and other employee-related expenses are a consideration as well.
Sales and marketing spend: Are you planning to increase your marketing budget? If so, by how much? If you’re planning on increasing revenue over time, you’re probably increasing marketing spend as well.
Other expenses (including one-off costs): Are there expenses you’re planning on incurring throughout the year? This can include costs like office space, software subscriptions, agencies, and one-time expenses, like holiday parties or team offsites.
Seasonality: Finally, does your business have a component of seasonality? If so, that can change the view of what your cash runway looks like. If you have a few down months in the year, it’s best to plan ahead for that, so you’re not caught off guard.
With these line items, you can get a more granular view of how your monthly burn rate will trend over time, and as a result, what your cash runway will look like in months to come.
There is no ideal runway for every company but, as a general rule of thumb, a runway shorter than twelve months is a cause for concern, given the time it takes to raise funding. The risk is that you go past the point of no return.
It can be helpful to create your own internal guidelines for how to think about cash runway. Here’s a green, yellow, and red system that we recommend:
Green: 48+ months of cash runway. This is a comfortable amount of runway — you’re in a good financial position, and can even consider increasing investments (like increasing headcount or marketing spend) to fuel future growth.
Yellow: 24 months of cash runway. In today’s climate, this signals that your cash reserves are being depleted, and you need to have a plan in place — whether that’s preparing to fundraise, establishing a timeline towards profitability, or starting to slow your burn rate.
Red: 12 months of cash runway or less. You’re in the danger zone. Something needs to change. You need to curb your burn rate immediately, and figure out how to buy yourself more time — whether that’s by raising more money, or getting to profitability.
Of course, companies that are close to profitability may get close to the twelve-month mark without much to worry about. However, that can create risks to the company’s financial stability, so cash runway should be closely monitored. It may be necessary to extend your runway at certain periods to give your business more time to reach profitability or secure additional funding.
So how do you increase cash runway? This can be achieved through several measures. The starting point, of course, is having up-to-date information on cash inflows and outflows so that you can accurately calculate runway in the first place.
From there, you can make decisions to slow burn rate and increase runway, when necessary. That includes restricting cash outflows by lowering overheads and pausing hiring or even making layoffs. It also means increasing cash inflows by generating more revenue, collecting more payments or raising more capital by securing external financing. (For more on how to slow your burn rate — and as a result, extend your cash runway — see this post).
The better you understand your cash runway, the more easily you can adapt to extend it. Use our cash burn template to become familiar with your monthly burn rate, and start tracking your cash runway.
Cash runway is the number of months you have until your business runs out of money.
Cash runway is calculated by looking at the cash you have in your bank account, and dividing it by how much money you're losing every month. In other words: total cash in bank ÷ monthly burn rate = cash runway (in months)