Cash Runway Explained: Formula, Examples, and Uses in Finance

What is Cash Runway?

Cash runway is the number of months a company can continue operating before it runs out of cash, assuming current spending levels stay the same. Startup businesses often use this metric to measure the rate at which the startup is spending its equity capital raised from investors. 

How to Calculate Cash Runway

The metrics needed to calculate a company’s cash runway include: 

1. Current cash balance, or cash on hand.
2. Net burn rate.

Burn rate refers to the rate at which a company depletes its cash pool in a loss-generating scenario. Startups generally operate at a loss in early stages because cash is used to grow their customer base and improve their products.

Gross burn rate refers to monthly cash expenses. You also need to know the net burn rate to calculate cash runway. 

For net burn rate, subtract monthly cash expenses (gross burn) from monthly cash sales:

Net Burn = Monthly Cash Sales – Monthly Cash Expenses

Cash Runway Formula

To calculate cash runway, divide the company’s cash on hand by its net burn rate. The formula looks like this:

Cash Runway = Current Cash Balance ÷ Monthly Net Burn Rate

Here’s a simple calculation example:

A startup has $250,000 in the bank. It’s spending $90,000 each month and bringing in $20,000.

That’s a net burn of $70,000 per month.

Cash Runway = $250,000 ÷ $70,000 ≈ 3.6 months

This startup will likely run out of cash in 3.6 months unless it raises capital soon to continue operating. Strategically cutting costs might also extend this runway, giving the leadership team more time to raise funds from existing or new investors.

What is a Good Cash Runway?

In many cases, companies aim for at least 6-12 months of runway. This gives the team time to hit key milestones, adjust course, or raise new funding without last-minute pressure. 

Recent data supports this range. In a 2024 survey of 110 venture capitalists, a majority (53.7%) advised their portfolio companies to maintain 6-12 months of runway before their next capital raise. Meanwhile, 29.6% recommended more than 18 months of runway. 

Context Matters in Determining Optimal Runways

Early-stage startups may get by with a shorter runway if they’re close to launching or fundraising. Established businesses with predictable revenue and expenses may find 6 to 12 months more than sufficient, especially when supported by rolling forecasts and cash flow visibility.

Given this information, it’s clear that the optimal cash runway varies depending on the company’s stage, industry, and specific circumstances. Startup teams and investors should carefully assess the company’s unique needs to determine the most appropriate runway length for their situation.

How to Extend Cash Runway

If a cash runway looks too short, the next step is to act quickly and strategically. Here’s how finance teams extend it:

• Cut nonessential spending: Start with discretionary expenses that don’t directly affect operations. Travel, conferences, offsites, and software tools with low usage are all areas where teams often find quick wins. These savings might not seem huge on their own, but they add up over a few months.
• Pause major hires or expenses: Hiring freezes and delayed capital purchases (like new equipment or office expansions) are often used to conserve cash. If the business isn’t yet ready to scale, holding off can extend the runway without compromising core operations.
• Speed up collections: Improving your accounts receivable process brings in cash faster. That might mean offering early payment discounts, tightening payment terms, or following up sooner on unpaid invoices. It doesn’t reduce your burn rate, but it improves cash flow timing, which extends your runway.
• Renegotiate terms: If the runway is shrinking fast, delaying payments or restructuring costs with vendors and creditors can help. Extending payment terms by even 30 days can make a difference, especially when combined with other cash conservation efforts.

Even a few small moves can stretch a cash runway long enough to buy time to increase revenue or land new funding.

Why Cash Flow Forecasting Matters for Cash Runway

A reliable financial forecast shows how much cash the business will have in the coming weeks and months. Without an accurate, up-to-date monthly cash flow forecast, you might miss early warning signs, overspend, or run out of cash too soon.

Regular forecasting helps teams plan spending, funding, and hiring decisions with confidence. Forecasting enables you to:

• Identify potential runway issues early, before they turn into urgent cash shortfalls.
• Run sensitivity analysis: Test how different internal decisions, like new hires, fundraising delays, or pricing changes, change the cash runway.
• Make faster decisions, whether that means cost-cutting, adjusting customer payment collections, or raising capital.

Regular updates to your forecast are critical to maintaining an accurate cash runway for timely decision making.

Make Cash Runway a Core Part of Financial Strategy

Cash runway helps businesses of all sizes plan spending, manage risk, and prepare for funding decisions with more accuracy and confidence. A clear cash flow forecast shows how money moves in and out of the business. With that insight, you can predict and track your cash runway and make smarter calls on spending, hiring, or raising capital.

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Additional Resources

Burn Rate and Template

Monthly Cash Flow Forecast Model

Ultimate Cash Flow Guide

See all Valuation resources