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Cash Runway

Understand the Cash Runway Concept

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Cash Runway

In This Article
  • What is the definition of the cash runway?
  • How are the cash runway and burn rate concepts related?
  • What formula is used to calculate the cash runway?
  • How can a company increase its cash runway?

Cash Runway Formula

The cash runway is closely tied to the burn rate, which is the rate at which a company is spending its cash, typically expressed on a monthly basis.

More specifically, in the context of cash flow negative start-ups – i.e. companies that are not yet profitable – the burn rate measures the pace at which a start-up is using its equity capital as typically raised from outside investors.

  • Gross Burn = Monthly Cash Expenses
  • Net Burn = Monthly Cash Sales – Monthly Cash Expenses

The burn rate is an important metric, as it is an input to the cash runway formula, as shown below:

Runway Formula

  • Cash Runway = Cash on Hand / Burn Rate

Importance of the Cash Runway

The burn rate and cash runway – two metrics that go hand-in-hand – dictate how long a start-up has until its current operations can no longer be sustained, making outside funding necessary.

If at that point the start-up is unable to raise additional capital, the start-up in all likelihood will be forced to shut down. As a result, start-up founders must estimate the cash runway to plan for the timing around when to begin raising interest from investors for the next financing round.

Otherwise, as a last resort, a start-up can increase its cash runway by:

  • Implementing Cost-Cutting Initiatives
  • Shutting Down Underperforming Business Units
  • Switching to Cash Payment Only (i.e. No Accounts Receivable, or “A/R”)
  • Liquidate Non-Core Inventory

The ease with which a start-up can raise capital is contingent on positive growth and other key performance indicators (KPIs), namely sales and user growth.

Start-ups with proven market traction and proof of concept within their target customer market and a clear plan for how to spend the newly raised capital are far more likely to raise enough capital for operations to continue.

Cash Runway Excel Template

Now, we can move on to a modeling exercise to calculate the cash runway of a company.

To get started, fill out the form below to access the Excel file.

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Cash Runway Example Calculation

For example, let’s say that a start-up currently has $200,000 in cash, which it previously raised from venture capital (VC) firms.

If the start-up has monthly cash sales of $50,000 and monthly cash expenses of $30,000, the net burn rate is $20,000 per month.

  • Net Burn = $50k – $30k = $20k

Given the net burn of $20,000 per month, the implied cash runway is equal to 10 months.

  • Cash Runway = $200,000 / $20,000 = 10 Months

Cash Runway Calculation

Therefore, the start-up has 10 months to either become profitable or raise its next round of equity funding from existing or new investors.

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