Cash runway

Cash runway tells you how many months the company can survive at its current rate of cash consumption. If you have 2.4 million pounds in the bank and your net burn rate is 200,000 pounds per month, you have 12 months of runway.

Runway is deceptively simple to calculate but profoundly important to interpret. It is not a static number. Revenue changes, expenses fluctuate, and seasonal patterns create variation. A drop in MRR or a spike in expenses can change runway dramatically. A 12-month runway calculated in January may look like a 9-month runway by March if a large customer churns or a hiring round increases expenses.

For venture-backed companies, runway determines fundraising timing. Most fundraising processes take 3-6 months, so a company needs to start raising when it has at least 9-12 months of runway remaining. Starting later creates a desperate negotiating position that leads to unfavorable terms or down rounds.

The basic formula divides available cash by monthly net burn:

Cash Runway = Cash Balance / Net Burn Rate

However, this assumes burn rate is constant, which it rarely is. A more realistic approach uses scenario-based runway calculations:

Optimistic scenario: assumes revenue grows at the current trajectory and expenses are held flat. Gives the longest runway estimate.

Base scenario: assumes revenue and expenses continue at the current monthly average. The most commonly reported number.

Pessimistic scenario: assumes revenue declines by 10-20% and expenses increase slightly (due to contractual obligations and committed hires). This is the scenario investors and boards care about most.

Smart finance teams present all three scenarios to give leadership a range rather than a single number. The pessimistic scenario should always have at least 6 months of runway.

The tree shows two paths to extending runway: increase the numerator (raise more capital) or decrease the denominator (reduce net burn through cost cuts or revenue growth). Annual prepayment collections are a particularly powerful lever because they accelerate cash in-flow without changing the subscription economics, effectively extending runway without external funding.

The standard recommendation across all stages is to maintain at least 18 months of runway after each funding round. This provides 12 months to execute on milestones and 6 months for the fundraising process.

In practice, the median venture-backed startup has 15-18 months of runway post-funding. Top-performing companies extend runway by growing revenue faster than expenses, sometimes reaching a "default alive" state where revenue growth will make the company free cash flow positive before cash runs out, even without additional funding.

Paul Graham's concept of "default alive vs default dead" is a useful framework. If you project current revenue growth and current expense growth forward, does the company become profitable before cash runs out? If yes, you are default alive and can fundraise from a position of strength. If no, you are default dead and must either cut costs or raise capital before the runway expires.

1. 1

   Accelerate cash collection

   Offer incentives for annual or multi-year prepayment. A customer who pays 12,000 pounds upfront instead of 1,000 per month gives you 11 months of additional cash to deploy immediately.

2. 2

   Reduce variable costs first

   Marketing spend, contractor costs, and discretionary budgets can often be reduced quickly. These provide immediate runway extension without the disruption of layoffs.

3. 3

   Grow revenue without proportional cost increases

   Product-led growth, self-serve onboarding, and expansion revenue all increase cash inflow with minimal incremental cost, reducing net burn and extending runway.

4. 4

   Secure non-dilutive financing

   Revenue-based financing, venture debt, and government grants can extend runway without equity dilution. These are most accessible when the company has predictable recurring revenue.

1. 1

   Using average burn rate during periods of rapid change

   If you just hired 10 people, the last 3 months of burn may not reflect the go-forward rate. Use the most recent month and add any committed but not-yet-incurred expenses.

2. 2

   Ignoring contractual commitments

   Lease payments, committed vendor contracts, and signed offer letters represent future cash obligations that reduce true runway even if they have not hit the bank statement yet.

3. 3

   Waiting too long to act

   The time to address runway is when you have 12+ months remaining and options are available. At 6 months, options are limited and expensive. At 3 months, survival is the only conversation.