Managing your business’s cash flow is crucial, but it’s also a complex process with many moving parts. Cash runway is yet another important aspect of managing your cash and helping steer your business towards growth and greater profitability.
But what exactly is cash runway? Let’s explore the cash runway definition, why it’s important and how to calculate it.
Cash runway is the length of time you can operate at a loss before you run completely out of cash. Let’s say that you’re burning through $20,000 a month and you have $80,000 in the bank. In this case, your cash runway would be four months.
When you look up cash runway meaning, you’ll also find information on burn rate. That’s because the two go hand-in-hand. You’ll need to know your burn rate in order to calculate your cash runway.
What is considered a good cash runway? This question is difficult to answer because it depends on a number of factors, including:
The goal is for your business to become “default alive,” meaning that your business is on the path to becoming profitable before running out of money.
That being said, many experts agree that 12-18 months is a healthy runway, especially for startups.
Startups often rely on fundraising rounds instead of revenue, so a healthy runway for a startup may be long enough to hit the next fundraising period.
Understanding your cash runway is important for a variety of reasons. The first and most obvious reason is that it gives you an idea of when your business will run completely out of cash. If the worst should happen (e.g., a global pandemic), your cash runway lets you know how long you can continue operating before you run into serious trouble.
Cash runway also:
If you’re not tracking your cash runway, then you run the risk of running out of cash unexpectedly.
For start-ups, it’s especially important to keep frequent (or near real-time) measurements of your cash runway to ensure that you don’t run out of cash before you even have a chance to launch. But every business can benefit from tracking their cash runway.
Businesses use their cash flow in different ways. In many cases, cash is divided into three categories:
In most cases, cash runway calculations will focus on company cash. However, founder and team cash may be included if the founder has to tap into their cash reserves or the company decides to pay employees with non-cash incentives, such as equity.
Most businesses will use their burn rate to calculate their cash runway. Your burn rate is the amount of cash you’re burning through (spending) each month.
You can calculate your burn rate using the following formula:
Once you have your burn rate, you can use this figure to calculate your cash runway.
When calculating your runway, you can use figures that span months or years, or you can simply use figures from the most recent month or quarter.
Calculating your cash runway is a relatively straightforward process.
The cash runway formula is:
Let’s say that a business has a cash balance of $1,000,000 and a burn rate of $63,000. Its cash runway would then be:
So, this business has nearly 16 months to play with, which may be more than enough time to get to the next round of funding or reach profitability.
Calculating runway is simple, but to make your calculations easier and more streamlined, you can also use a cash runway template in Excel.
If you find that your runway is less than ideal, there are steps you can take to make your runway a little bit longer. Ultimately, it comes down to reducing your expenses, increasing your income, or both.
Here are some strategies you can use to achieve one or both of these objectives.
One simple way to extend your runway is to cut back on unnecessary expenses. You likely have at least a few expenses that aren’t absolutely essential to your daily operations.
Here are some examples on how you can cut back on expenses:
You may also be able to cut back on expenses by negotiating with your suppliers to get a better price or better payment terms.
Go over your expenses carefully and analyze each one to see if you can either reduce them or eliminate them completely.
Another obvious way to extend your cash runway is to find ways to increase sales. You may be able to boost sales by:
These are just a few of the many ways you can boost sales to help extend your cash runway.
If your cash runway is short, it may not be the best time to make a major purchase. Delaying big purchases can help give your business a little breathing room and extend your runway.
The only exception here is if you’re planning to make an investment that will generate revenue immediately or in the very near future.
If you need to extend your runway fast and your next round of funding is still far off, you may consider loans or grants to keep the business afloat.
Government-backed loans or a grant (which is free money) may give you just enough cash to reach your next round of funding. One thing to note here is that grants can take several weeks or months to be approved, so they may not be something you rely on for immediate, emergency cash.
Proper management of your business’s cash flow is key to ensuring that your company stays on the path of growth and success. If you’re not managing or monitoring your cash flow closely, you may find yourself running out of funds – and fast.
Managing your cash flow and understanding your cash runway doesn’t have to be complicated. With Cash Flow Frog, you can create cash flow forecasts, scenarios and more in minutes. Our platform empowers you to take charge of your cash flow with powerful tools, like customer insights, projections, planned vs. actual, multiple perspectives and more.
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