Runway

How runway works

Runway answers one question: at the current rate of cash consumption, how long until the bank balance reaches zero. It is a division, and both inputs are cash figures, not accounting figures.

Runway in months = cash and cash equivalents ÷ average monthly net burn

Net burn is the number that belongs in the denominator. Gross burn is everything going out; net burn subtracts cash actually collected from customers in the same period. A company that spends 400,000 dollars and collects 150,000 dollars is depleting the balance by 250,000 dollars, and 250,000 is what shortens the runway.

Three definitional choices change the answer materially, and teams should state which they are using.

• What counts as cash. Cash and equivalents plus short-term marketable securities is the usual definition. Undrawn debt facilities do not belong in the numerator, because drawing them is a decision with covenants attached; they are better reported as a separate line of available liquidity.
• Which burn. A trailing three-month average smooths out payroll timing, annual insurance payments, and lumpy enterprise collections. A single month can mislead in either direction.
• Whether burn is held constant. The simple formula assumes a flat burn. A company with growing revenue and flat costs has a longer runway than the formula shows; one that is hiring on plan has a shorter one. Anything beyond a few months should be modeled month by month from a cash forecast rather than divided.

Two derived versions of the measure do most of the work in practice. Gross runway divides cash by gross burn and answers what happens if revenue goes to zero, which is the relevant question when a single customer is most of collections. Forecast runway, sometimes called runway to plan, comes out of a month-by-month cash model incorporating the hiring plan, the collections forecast, and known one-time outflows such as a tax payment or a lease deposit.

Paul Graham's framing of the same arithmetic is useful and widely used in practice: a company is default alive if it can reach profitability on its current trajectory with the money it already has, and default dead if it cannot. That reframes runway from a countdown into a test of whether the growth rate closes the gap before the cash does.

Worked example

Suppose a company is modeling runway three ways on the same balance sheet. These figures are hypothetical.

Opening cash is 4,200,000 dollars. Over the last three months, gross cash outflows were 620,000, 655,000, and 690,000 dollars. Cash collections were 240,000, 265,000, and 300,000 dollars.

Step one, average gross burn. 620,000 plus 655,000 plus 690,000 equals 1,965,000, divided by three equals 655,000 dollars per month.

Step two, average collections. 240,000 plus 265,000 plus 300,000 equals 805,000, divided by three equals 268,333 dollars per month.

Step three, average net burn. 655,000 minus 268,333 equals 386,667 dollars per month.

Step four, simple net runway. 4,200,000 divided by 386,667 equals 10.9 months.

Step five, gross runway. 4,200,000 divided by 655,000 equals 6.4 months. That is the answer if collections stop entirely.

Step six, forecast runway. Collections are growing about 10 percent per month and outflows about 4 percent. Projecting forward month by month, net burn falls from 387,000 to roughly 353,000 by month six and to roughly 207,000 by month twelve, and cumulative cash consumed reaches 4,200,000 in month fourteen. Forecast runway is about 14 months.

The three numbers are 6.4, 10.9, and 14 months, from the same balance sheet. A board conversation that does not specify which one is being quoted is not a conversation about the same company. The conservative number is the one that should drive the decision on when to start raising, because the optimistic one depends on a growth rate that has not happened yet.

Where it shows up

The monthly investor update and the board deck carry the figure most often, usually as a cash slide showing closing cash, net burn for the month, and months of runway remaining, with a forecast to the zero-cash date. Investors read the trend across months more than the number in any one of them.

The thirteen-week cash flow forecast is the operating version. It is built from receipts and disbursements by week rather than from the income statement, and it is what a finance team uses to decide whether a hire or a prepayment is safe.

Audited financial statements are where the concept becomes a formal disclosure. Under United States GAAP, management must evaluate whether there are conditions raising substantial doubt about the entity's ability to continue as a going concern within one year after the date the financial statements are issued, and disclose the conditions, management's evaluation, and its plans. That standard, ASC 205-40, added by FASB's Accounting Standards Update 2014-15, is why a company with under twelve months of cash at audit time ends up negotiating going-concern language with its auditors.

Venture debt and revolving credit agreements convert runway into a covenant. A minimum liquidity or minimum cash covenant sets a floor below which the balance may not fall, and some facilities express it as a minimum number of months of remaining runway at the tested burn rate. Breaching it can block further draws or accelerate repayment, which is why undrawn capacity is not the same as cash.

Term sheets and investor diligence requests ask for it directly, normally as closing cash, monthly net burn for the last six to twelve months, and the date the current cash runs out.

Common mistakes

• Quoting runway on gross burn to one audience and net burn to another. Name the basis every time.
• Counting undrawn debt as cash. It is available liquidity with conditions, and covenants can withdraw it precisely when it is needed.
• Using a single month's burn. Payroll cycles, annual prepayments, and enterprise collection timing make any one month unrepresentative.
• Confusing bookings with collections. Only cash received reduces net burn. A signed annual contract billed quarterly in arrears does nothing for this month's runway.
• Forgetting scheduled outflows that sit outside operating expense: debt amortization, tax payments, deferred compensation, deposits, and the cost of the financing itself.
• Starting a raise on the last six months of cash. Processes take time, and a counterparty that can compute your zero-cash date has read your negotiating position off your own data room.
• Cutting burn without modeling the effect on growth. Reducing spend extends the denominator but can also shrink the collections that were offsetting it.

Related terms

Runway is cash divided by burn rate, so everything that changes burn changes runway. A short runway is the usual reason a company raises a seed round or a bridge, considers debt financing or a convertible note, and is the condition under which a down round becomes likely. On the fund side, the analogous idea is dry powder: capital committed but not yet deployed.

Frequently asked questions

How do you calculate startup runway?

Divide cash and cash equivalents by average monthly net burn, where net burn is gross cash outflows minus cash collected from customers. Use a trailing three-month average rather than a single month, and model month by month rather than dividing when revenue or costs are changing quickly.

How much runway should a startup have?

There is no standard, and any figure quoted as one is a convention rather than a rule. The operative constraint is that a financing process takes time to run and closes with a period of diligence and documentation afterwards, so the relevant question is whether the remaining runway comfortably exceeds the time a raise takes plus a margin for it not working the first time.

What is the difference between gross runway and net runway?

Gross runway divides cash by gross burn and answers what happens if revenue stops. Net runway divides cash by net burn and reflects the trajectory the company is actually on. Net runway is always the longer number, and gross runway is the one to check when revenue is concentrated in a small number of customers.

Does runway include money the company has committed but not received?

No. A signed term sheet, an unsigned SAFE, an undrawn credit facility, and a grant awarded but not disbursed are all outside the numerator. Report them separately as available or expected liquidity so nobody mistakes them for cash in the account.

What is default alive versus default dead?

Paul Graham's terms for whether a company can reach profitability on its existing money and current trajectory. A company that can is default alive; one that cannot is default dead and is depending on a future financing that has not happened. The distinction matters because the two situations call for different decisions about hiring and spending.

How does runway affect an audit?

United States GAAP requires management to assess whether conditions raise substantial doubt about the ability to continue as a going concern within one year after the financial statements are issued, and to disclose those conditions and its plans. A company at or under twelve months of cash when the statements are issued will be having that conversation with its auditors.