Cash Runway

What Is It?

Cash Runway represents the amount of time a company can continue operating before it runs out of cash, based on its current cash reserves and burn rate. It’s like calculating how many more months your business can survive before needing additional funding or becoming profitable.

What’s Included? 💼

Cash Runway calculation considers:

• Cash Components:

  • Current cash balance

  • Cash equivalents

  • Short-term investments

  • Available credit lines

  • Committed funding

• Burn Rate Components:

  • Operating Activities:

    • Employee costs

    • Rent and utilities

    • Marketing expenses

    • Other operating costs

  • Investing Activities:

    • Planned capital expenditures

    • Expected investment needs

  • Financing Activities:

    • Debt payments

    • Interest obligations

👆 By the way, an interesting fact: During economic downturns, investors often recommend companies maintain at least 18-24 months of runway, twice the traditional 9-12 month recommendation!

How to Calculate It

The basic formula is:

Cash Runway = (Cash + Cash Equivalents) / (Operating Costs + Investing Costs + Financing Costs – Monthly Revenue)

For example:

• Current Cash and Cash Equivalents: $1,000,000

• Monthly Net Burn: $100,000

• Cash Runway = 10 months

Why It Matters

Understanding cash runway is crucial for:

1. Planning fundraising timing

2. Making hiring decisions

3. Managing growth rate

4. Setting spending priorities

5. Strategic planning

6. Survival planning

Types of Runway Analysis

1. Conservative Runway:

   • Uses gross burn rate

   • Ignores potential revenue

   • Most conservative estimate

2. Realistic Runway:

   • Uses net burn rate

   • Includes predictable revenue

   • Most commonly used

3. Optimistic Runway:

   • Includes potential revenue increases

   • Considers cost optimizations

   • Used for best-case scenarios

Managing Cash Runway

To extend your runway:

1. Reduce Burn Rate:

   • Optimize operations

   • Cut non-essential costs

   • Delay expansion plans

   • Negotiate better terms

2. Increase Cash:

   • Accelerate revenue

   • Collect receivables faster

   • Seek additional funding

   • Sell non-core assets