Cash runway

The cash runway is a critical financial metric for start-ups and early-stage companies because it indicates how long they can sustain their operations before needing to secure additional funding or generate sufficient revenue to cover their costs.

Cash runway can be calculated using the following formula:

In this formula:

• cash balance refers to the amount of cash and cash equivalents the company currently holds
• the burn rate is the net cash outflow, typically on a monthly basis.

If Company ABC has $100,000 of cash on hand, and burns its cash at a rate of $20,000 per month, it would therefore have a cash runway of five months. Concretely, this means the company can continue to operate for five months before needing to find additional funding or increase its revenue.

To calculate an accurate burn rate, note that it is important to select a sufficiently long period, if at all possible. For example, using only two months of data will not accurately capture spending fluctuations and can lead to an inaccurate measure. A longer period provides a more stable and representative view of the company’s cash outflow trends.

Cash runway is an important metric for several key reasons. First, it helps start-ups and investors to understand the company’s trajectory and allows founders to better plan their operations and funding strategies. A longer runway provides more time to achieve key milestones, secure new funding or generate additional revenue without immediate financial pressure.

This metric is also important for assessing a company’s financial health and investment risk. A short runway may signal a higher risk of financial distress, which could influence investment decisions. Conversely, a longer runway usually implies financial stability and a strategic approach to managing cash flow.