# Cash Runway

Understand the Cash Runway Concept

In This Article
• What is the definition of the cash runway?
• How are the cash runway and burn rate concepts related?
• What formula is used to calculate the cash runway?
• How can a company increase its cash runway?

## How to Calculate the Cash Runway

The cash runway is closely tied to the burn rate, which is the rate at which a company is spending its cash, typically expressed on a monthly basis.

More specifically, in the context of cash flow negative start-ups – i.e. companies that are not yet profitable – the burn rate measures the pace at which a start-up is using its equity capital as typically raised from outside investors.

• Gross Burn = Monthly Cash Expenses
• Net Burn = Monthly Cash Sales – Monthly Cash Expenses

The burn rate is an important metric, as it is an input to the cash runway formula.

## Cash Runway Formula

The formula for calculating the cash runway is as follows.

###### Runway Formula
• Cash Runway = Cash on Hand / Burn Rate

## Importance of the Cash Runway

The burn rate and cash runway – two metrics that go hand-in-hand – dictate how long a start-up has until its current operations can no longer be sustained, making outside funding necessary.

If at that point the start-up is unable to raise additional capital, the start-up in all likelihood will be forced to shut down. As a result, start-up founders must estimate the cash runway to plan for the timing around when to begin raising interest from investors for the next financing round.

Otherwise, as a last resort, a start-up can increase its cash runway by:

• Implementing Cost-Cutting Initiatives
• Shutting Down Underperforming Business Units
• Switching to Cash Payment Only (i.e. No Accounts Receivable, or “A/R”)
• Liquidate Non-Core Inventory

The ease with which a start-up can raise capital is contingent on positive growth and other key performance indicators (KPIs), namely sales and user growth.

Start-ups with proven market traction and proof of concept within their target customer market and a clear plan for how to spend the newly raised capital are far more likely to raise enough capital for operations to continue.

## Cash Runway – Excel Template

We’ll now move to a modeling exercise, which you can access by filling out the form below.

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## Cash Runway Example Calculation

For example, let’s say that a start-up currently has \$200,000 in cash, which it previously raised from venture capital (VC) firms.

If the start-up has monthly cash sales of \$50,000 and monthly cash expenses of \$30,000, the net burn rate is \$20,000 per month.

• Net Burn = \$50k – \$30k = \$20k

Given the net burn of \$20,000 per month, the implied cash runway is equal to 10 months.

• Cash Runway = \$200,000 / \$20,000 = 10 Months

Therefore, the start-up has 10 months to either become profitable or raise its next round of equity funding from existing or new investors.

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