Key takeaways
- Cash runway (months) = cash available ÷ net monthly burn.
- Gross burn is everything you spend in a month; net burn is gross burn minus the cash that comes in. Runway uses net burn.
- Use an average of the last three months, not one unusual month, and count cash only when it actually arrives.
- Act while you still have at least six months left: cutting costs, raising prices or finding funding all take longer than expected.
What cash runway means
Runway is the number of months until your bank balance reaches zero at your current rate of spending and income. It is the most important number for a business that is not yet profitable, whether that is a startup, a new shop in its first year, or an established firm going through a slow season.
Profit and runway are not the same thing. A business can be profitable on paper and still run out of cash, for example when customers pay invoices late, when money is tied up in stock, or when loan repayments are due. Runway looks only at cash.
Gross burn vs net burn
Gross burn is the total cash that leaves the business in a month: rent, wages, stock, software, marketing, loan repayments and everything else. Net burn is gross burn minus the cash that comes in from customers in the same month.
Runway uses net burn, because income slows the rate at which cash disappears. Gross burn is still worth knowing: it is how fast you would run out if sales stopped completely.
Gross burn = Total cash paid out in the month Net burn = Gross burn − Cash received in the month
The cash runway formula
Divide the cash you have available by your net monthly burn. Count cash in business bank accounts plus anything you can draw on at short notice, such as an unused credit line, but be honest about whether you would really use it.
Work out net burn from the last three months and take the average. One month can be distorted by a big annual bill, a one-off sale or a late payment.
Cash runway (months) = Cash available ÷ Average net monthly burn
Free toolCash runway calculatorWorked example: a small design studio
A three-person design studio has $48,000 in the bank. Over the last three months it paid out an average of $19,000 a month and collected an average of $13,000 a month from clients.
- Eight months sounds comfortable, but the last line shows how exposed the studio is if its biggest client pays late.
- If a $9,000 invoice is overdue, the studio’s real position is better than its bank balance suggests, but only if the client pays.
| Figure | Working | Result |
|---|---|---|
| Gross burn | average cash paid out | $19,000 a month |
| Cash received | average client payments | $13,000 a month |
| Net burn | $19,000 − $13,000 | $6,000 a month |
| Cash runway | $48,000 ÷ $6,000 | 8 months |
| Runway if clients stopped paying | $48,000 ÷ $19,000 | about 2.5 months |
Testing ways to extend your runway
Runway reacts strongly to small changes in net burn, because net burn is the gap between two larger numbers. Here is the same studio with different changes.
- A $2,000 cost cut adds four months; adding $3,000 of income doubles the runway.
- Losing one client takes three months off. Check how much of your income depends on a single customer.
| Change | Net burn | Runway |
|---|---|---|
| No change | $6,000 | 8 months |
| Cut costs by $2,000 a month | $4,000 | 12 months |
| Collect $3,000 more a month | $3,000 | 16 months |
| Both | $1,000 | 48 months |
| Lose a client worth $4,000 a month | $10,000 | about 5 months |
How to make your runway longer
Some changes take weeks to show up in the bank, so start early.
- Get paid faster: invoice as soon as work is delivered, ask for deposits on large jobs, offer card payment and chase late invoices promptly.
- Raise prices where you can. A price rise goes almost entirely to cash, while a cost cut usually saves less than it first appears.
- Cut or pause costs that do not bring in revenue soon: unused software, low-return advertising, and stock you will not sell this season.
- Ask suppliers for longer payment terms and landlords for staged payments before you are desperate, not after.
- If you borrow, compare the monthly repayment with your net burn. A loan adds runway only if its repayments are smaller than the time it buys.
When to act
Recalculate runway every month, at the same time you close your books. Treat the figure as a timer, not a forecast: if nothing changes, this is when the money runs out.
A common guideline for startups is to begin raising money or making cuts with at least six months of runway left, because fundraising, hiring changes and new sales all take months to land. Small businesses that are already profitable often aim to keep three to six months of operating costs in reserve for slow periods.
