Cash runway is the number of months you have until your company runs out of cash. More technically, it refers to the amount of time a company has to operate at a loss, based on their estimated burn rate relative to their cash balance. It is an especially important metric for seed- and early-stage startups.
Perhaps the most important aspect of extending your cash runway is that doing so can be pivotal to keeping the doors open between funding rounds. It is even more important during periods in which the capital markets are going through significant changes. Right now, in 2022, is a prime example of that.
However, knowing about cash runway, as well as your own cash runway at any given moment, is an essential part of running a business no matter how easy or difficult it is to secure funds or financing.
You should look to strategize extending your company’s cash runway right away if you haven’t done so already. A sufficient strategy to extend your cash runway can help prevent overspending and, in the worst scenario, prevent you from running out of capital to fund your business, helping you keep the doors open and weathering crises.
Although startup companies are often more familiar with the concept of cash runway, it is just as beneficial for more mature companies to have an understanding of company spending and current cash balance. Keeping a close eye on cash inflows and outflows is not only beneficial from a cash runway perspective, it also allows you to ensure that your money is used efficiently.
In this article, we’ll explain what cash runway is, why it’s important, and how to calculate your cash runway. Furthermore, we’ll review some common strategies used to extend it and the benefits of an extended cash runway.
What is Cash Runway?
Cash runway is the number of months you have left until you run out of money to operate. It measures how long your money will last with your current cash burn rate, and is an important metric for several reasons.
When your company is in a cash “burning” stage (i.e. you’re spending your money), it is crucial to estimate how many months your business can operate in a loss position (i.e., you’re not generating revenue) before completely running out of cash. You can estimate this “runway” using a cash runway analysis.
In the event that your company will not bring in any additional income or funding, how long will you be able to continue to pay for operating expenses? The cash runway analysis of the estimated monthly burn rate commonly combines historical spending rate and projected future expenditures, and will tell you how many more months you can continue paying operating expenses at the current burn rate.
It is the simplest way to visualize your monthly burn rate, and can demonstrate whether you have enough money in the bank to survive until you are either cash flow-positive or successfully raise a new round of funding.
If you don’t have enough cash, you will need to cut costs to extend your runway or reallocate your cash to better support growth. Understanding your current burn rate helps you use capital strategically and forecast future fundraising needs better.
Not only will it be important for you to know how much is being spent and how much runway is left, existing and future investors will rely on these factors to keep track of spending, showing financial maturity.
Why is Cash Runway Important?
If you know what your company’s cash runway is, you can:
- Know exactly how much money you have in the bank and what your burn rate is
- Ensure your company is running efficiently
- Strategize when you need to fundraise
- Identify if you are overspending and avoid tapping into reserves
- Determine if there is excess capital to put towards your cash reserves
Having a proper understanding of your cash runway is significant in ensuring your company is running efficiently, avoiding overspending, and planning fundraising needs accordingly. The fundraising process can be tedious and lengthy, so it is important to know when to allocate resources for securing the next fundraising round.
At the end of the day, cash runway can help you answer the question that drives the business concept of default dead or alive: “Will the company turn cash flow positive before its runway ends?”
Being default alive means you are on track to becoming profitable with the resources currently on hand, while being default dead means you don’t have enough on hand to cover your expenses.
Knowing your cash runway can help prevent you from defaulting dead, and avoid failing due to poor financial planning.
How to Calculate Cash Runway Using the Burn Rate
In order to calculate your cash runway, you need to know your burn rate. Burn rate, or gross burn rate in this case, is the estimated monthly cost to run your business, and includes all expenses necessary for your business to operate. It is important to overestimate your burn rather than underestimate it.
It should also be noted that gross burn rate is sometimes confused with another term, net burn rate, which simply represents your monthly net loss. If you’re not generating any income, the distinction between these two terms is less important.
However, if you are bringing in monthly income, then the distinction does indeed matter. In this article, when we mention burn rate, we’re always referring to gross burn rate.
When calculating your burn rate, include projected future expenses if possible. You can calculate your historical burn rate from previous months’ bank statements by looking at the cash outflows. Here is a breakdown of the basic formula for calculating burn rate:
Burn Rate = (starting cash balance – ending cash balance) / # of months
After you’ve calculated your burn rate, you can determine your runway by dividing your current cash balance by your estimated burn rate. The cash runway formula looks like this:
Cash runway = current cash balance / burn rate
After calculating burn rate and runway, you will have a better idea of how long you have to operate at your current burn rate.
What Are Some Ways You Can Extend Cash Runway?
It is impossible for anyone to predict how the market will evolve from one state to the next. However, that doesn’t mean you shouldn’t prepare for a rainy day.
Regardless of your cash balance, allocating your capital efficiently and being prepared for changing economic circumstances can be vital for your company’s ability to operate. Maximizing your runway is not just about preserving cash. Developing a strategy for extending your cash runway while adding value is essential for generating long term growth.
There are several strategic approaches to extending your cash runway that can prevent insolvency, as well as contribute to creating additional value.
Generate Additional Revenue
Although it is harder said than done, generating additional revenue to fund operations is a great way to extend your cash runway. Shifting focus on securing income generating ventures such as partnerships and contract revenue for biotech companies is a good strategy to extend your runway, while creating additional value to your company.
Tighten Up Receivables & Collections Processes
Having more accurate financials allows you to evaluate your current progress and make more suitable decisions about future spending. Improved financial processes can be achieved by closely monitoring cash inflows and cash outflows. Accurate tracking ensures nothing goes unnoticed, making it easier to address issues early on before they become unavoidable.
Redirect Focus on Cutting Expenses
Cutting expenses is the most traditional way of extending cash runway. Finding methods to reduce your operating expenses can seem difficult, but is achievable by continuously managing your cash and creating a priority list for expenses. Certain expenses are required for your business to operate sufficiently, and should be placed at the top of your priority list. Start cutting costs by reducing spend on expenditures on the bottom of your priority list.
Be Prepared for Your Next Round of Funding
Investors are becoming more conservative and holding onto more cash as the current market downturn continues. As a result, raising funding through venture capital (VCs) will be more competitive.
This is why it is important to be fully prepared for raising additional funding. In the event that something doesn’t go according to plan—your funding round closes a couple of months later than anticipated, for example—having an existing strategy for extending your runway will come in handy.
Demonstrating financial maturity and an understanding of your cash runway will show investors you will know how to manage a large cash injection should they choose to invest in your business. If you’ve already received funding, buckle down on accomplishing investor milestones along with prioritizing R&D to ensure a better possibility of securing the next funding round.
Explore Alternative Funding Sources
Non-traditional forms of funding can make a significant difference in extending your cash runway. However, it is vital that you find alternative financing partners interested in the growth of your company. Financing partners with founder friendly terms can be pivotal in extending your runway.
For example, Excedr’s lab equipment leases provide biotechs and biopharmas with a way to extend their cash runway while acquiring the equipment needed to perform R&D and hit important investor milestones.
Because we don’t ask for any equity or impose burdensome terms (like collateral, IP pledges, or debt covenants) in our leases, we put the founders first, allowing them to support their business and its growth without giving up a piece of the pie or enter into a less-than-ideal contract.
How Does Having an Extended Runway Benefit Your Company?
An extended runway ensures a greater possibility of your company being able to survive possible obstacles that result from economic slowdown such as unsure future funding and decreased overall spending in the economy.
In the event that the extended cash runway is not needed in the future, all of the capital can be reallocated back into R&D or other growth generating operations. Planning and strategizing for the future will not hinder your success, it will simply make the inevitable hurdles less challenging.
Takeaways? Make Extending Your Cash Runway a Priority
In the current economic climate, it is very important to strategize how you will go further with the current capital you have. Failing to plan is planning to fail. Start by understanding the cash runway and calculating how many months you have at your current burn rate.
Ultimately, finding ways to improve cash utilization by creating additional revenue, exploring alternative funding sources, and finding other methods to plan for contingencies, can be a deciding factor for long term success.
Excedr’s lab equipment leasing program is just one realistic option for extending cash runway, and offers founder-friendly terms that can help you hold onto more capital and equity while getting the lab equipment you need to power your R&D.