What is runway

Definition

Runway, also called cash runway, is how long the money in the bank lasts. The standard runway divides the cash balance by the monthly net burn, which is the cash that goes out in a month minus the cash that comes in, so it already counts the income the business keeps earning. A second number is the stress test: the cash divided by total monthly spending, which shows how long the business lasts if income stops. Name which one you calculated, because they differ a lot. Turn the months into a date, the month the cash runs out, and put it on the calendar. Only money in the account counts as cash. Invoices customers have not paid are not cash yet, and an unused credit line is shown next to runway as a separate figure, never inside it, because the bank can reduce or withdraw it. The simple division assumes costs stay flat, so when hires or large purchases are planned, a month by month forecast gives the honest answer.

Why it matters

The essayist and investor Paul Graham put it as a question in 2015: if expenses stay the same and income keeps growing at the pace of the last few months, does the business reach profit on the money it has left? He called that default alive, and the opposite default dead, and noted that many founders do not know which one they are. A small business that is not raising money needs the same answer: how many months it has to fix its prices, collect what it is owed or cut costs, before the bank decides for it.

Directly related: Burn rate, Cash flow, Break-even point.

Formula

Runway = Cash Balance / Monthly Burn Rate

Improvement tips

• Keep two numbers side by side: runway at the current income and runway if income stops.
• Write the month the cash runs out in the calendar, and decide today what you will do two months before it.
• Recalculate every month from the actual bank balance, and switch to a month by month forecast when you plan hires or large purchases.
• Show an unused credit line as a separate line next to runway, never inside it.
• If you plan to raise money or take a loan, start while runway still covers the whole process and a margin for delays.

Common mistakes

• Not saying which runway you calculated: cash over net burn, or cash over total spending if income stops.
• Dividing today's cash by today's burn while planning hires that will raise the burn next month.
• Taking a rule of thumb from venture backed startups and applying it to every business.