Runway
Why it matters
Runway puts a date on every decision. A new hire, a price cut or a slow quarter each shorten or lengthen it. Without the number, a business can feel comfortable until the account is nearly empty, because revenue and costs both drift slowly. Runway merges the two into one figure that rings an alarm in time to act. It also sets the timeline for raising money, since raising takes months and is much easier with a year of cash left than with three months.
How to apply it
- Divide current cash by net monthly burn to get months of runway.
- Recalculate every month. One hire or one lost customer can move it a lot.
- Model a slower case as well as the current trend, such as a few lost customers or a delayed deal.
- Set a trigger, for instance six months left, that forces a decision on cutting spending or raising money.
- Share the number with everyone who controls spending.
What it is
Runway is a countdown. If the business holds 120,000 in cash and loses 10,000 a month once revenue is subtracted from costs, runway is twelve months. The monthly loss is the net burn rate. A business that is profitable has no burn and, for practical purposes, no deadline.
The number is only as good as its inputs. Cash on hand should be money that is actually available, not money already owed to suppliers or the tax office. Burn should reflect real spending, including costs that arrive annually or quarterly.
Common mistakes
- Using last year's average burn when costs have since risen.
- Counting expected deals as cash.
- Forgetting that runway is a point-in-time estimate that changes whenever burn changes.
