What is cash runway?
Cash runway is an important metric that measures the amount of time that a company has before it runs out of cash, provided they don't raise any additional funds.
It shows how long a company can remain in business before reaching $0.
How to calculate cash runway?
To calculate the cash runway, divide the ‘current cash balance’ of your company by its ‘burn rate’, which is the rate at which the company is spending its cash. And you shall receive the answer in the number of months.
Formula for calculating cash runway
Real-life example of cash runway
Let’s say your business has $100,000 in cash currently. Provided that your business has monthly cash sales of $50,000 and monthly cash expenses of $30,000, your burn rate will be $20,000 (50,000 - 30,000). Then, your cash runway will be: 100,000 / 20,000 = 5 months.
This means, your business can survive 5 months before it runs out of cash.
What’s considered a good cash runway? (benchmark)
A ballpark figure for a good cash runway is 12-21 months. The ideal cash runway for a business will depend on its product, business stage, growth strategy, team, business model, and more.
Most entrepreneurs and experts recommend having at least twelve months of runway at all times. In one survey, 55% of startup founders reported fewer than six months of runway left.
A longer cash runway is generally considered better, as it gives a company more time to raise additional funding or become profitable.
Ways to extend your cash runway
- Invoice promptly and follow up on due invoices: Invoicing promptly and consistently can help ensure that you are paid on time by your customers. And if you have customers who are paying late, it may be helpful to follow up with them to remind them of their payment obligations. Read: 12 Strategies To Get Your Customers To Pay Earlier
- Review your pricing: If you are not charging enough for your products or services, it can impact your ability to generate sufficient cash flow to support your business. Consider reviewing your pricing to ensure that you are charging a competitive rate that will allow you to extend your cash runway.
- Look into financing options: If you are struggling to extend your cash runway, you may want to consider looking into financing options, such as a business loan or raising capital, to help provide your business with the capital it needs to support its operations.