Understanding Cash Runway

Cash runway is a crucial metric for startups and businesses, representing the amount of time (usually in months) a company can continue operating before it runs out of cash, assuming current income and expenses remain constant.

Why is it important?

• Financial Planning: It helps you understand when you might need to raise additional funding, cut costs, or increase revenue.
• Investor Confidence: Demonstrates financial awareness and planning to potential investors.
• Decision Making: Informs strategic decisions about hiring, spending, and growth initiatives.

How it’s Calculated

The calculation is straightforward:

Cash Runway (in months) = Current Cash Balance / Monthly Net Burn Rate

Where:

• Current Cash Balance: The total liquid cash the company has readily available (e.g., in bank accounts).
• Monthly Net Burn Rate: The net amount of cash the company spends each month. It’s calculated as: Total Monthly Expenses - Total Monthly Revenue. If you are profitable (revenue exceeds expenses), your burn rate is negative, and your cash runway is technically infinite (or increasing).

Using the Estimator

1. Enter Current Cash Balance: Input the total amount of cash your company currently possesses.

2. Enter Monthly Net Burn: Input the net amount of cash your company is spending per month. Ensure this is a positive number representing cash outflow.

   • Example: If your monthly expenses are $70,000 and your monthly revenue is $20,000, your net burn is $50,000.

The estimator will then calculate how many months you can operate before exhausting your cash reserves.

Assumptions & Limitations

• Constant Burn Rate: This calculator assumes your monthly net burn rate will remain constant. In reality, revenue and expenses fluctuate.
• No Additional Funding: It doesn’t account for any potential incoming funding rounds or unexpected cash inflows.
• Simple Calculation: This is a basic estimate. More detailed financial modeling would consider factors like accounts receivable, accounts payable, seasonality, and growth projections.

Use this tool as a starting point for financial planning and conversation, not as a definitive financial forecast.