What is Cash Runway?
Cash Runway is a measure of how long a company can continue operating with its existing cash reserves. It refers to the amount of time until a company's cash balance is depleted if it continues to spend money at the current rate. In other words, Cash Runway is the length of time a business can continue to operate before it runs out of cash.
Why Cash Runway Is Important
Cash Runway is an essential metric for businesses of all sizes, but especially for startups and small businesses. It's important for several reasons:
- Planning: Cash Runway allows you to plan for the future. If you know how much time you have before you run out of cash, you can make informed decisions about future investments, hiring, and other expenses.
- Fundraising: Investors and lenders often look at a company's Cash Runway as a key indicator of financial health. A long Cash Runway shows that a company has enough cash to weather unexpected expenses and continue operating while it seeks additional funding.
- Stress Testing: Understanding your Cash Runway can help you stress-test your business model. For example, if you know that you only have a few months of Cash Runway left, you can make changes to your business to extend that or raise funds before they run out.
How to Calculate Cash Runway
Cash Runway is calculated by dividing the company's cash balance by its monthly Cash Burn Rate. The Cash Burn Rate is the amount of cash a company spends each month on operating expenses, including salaries, rent, and other costs. Here's the formula for calculating Cash Runway:
Cash Runway = Cash Balance / Monthly Cash Burn Rate
For example, let's say a company has a cash balance of $100,000 and a monthly burn rate of $10,000. Its Cash Runway would be:
Cash Runway = $100,000 / $10,000 = 10 months
This means that the company has 10 months of Cash Runway before it runs out of cash, if it continues to spend money at its current rate.