Runway is how many months the company can operate before running out of cash. The calculation is simple arithmetic and the inputs are where the errors live.
The calculation
Runway in months = cash in bank divided by net monthly burn.
Net burn is cash out minus cash in. A company spending $120,000 a month and collecting $45,000 has a net burn of $75,000. With $900,000 in the bank, that is twelve months.
Gross burn is total spend regardless of revenue. Investors ask about both: net burn shows the current position, gross burn shows the cost base if revenue disappeared.
Use cash, not accrual. A customer who signed a $200,000 annual contract and pays in 60 days contributes nothing to this month’s runway.
The costs that get forgotten
Runway calculations are consistently optimistic because the same items are omitted.
- Employer taxes and benefits. Frequently 15–30% on top of salaries depending on jurisdiction.
- Annual contracts renewing — insurance, software, audits, legal retainers. Fine until three of them land in the same month.
- Tax payments. Corporation tax, VAT or sales tax, payroll remittances. Money you hold and do not own.
- Already-agreed hires. Someone accepting in March who starts in June is already a commitment.
- Severance, if cuts become necessary. Reducing headcount costs money before it saves money.
- Foreign exchange for companies earning and spending in different currencies.
Forecast three scenarios, not one
A single forecast will be wrong. Three bracket the outcome usefully.
Base case. Revenue grows at the rate it has recently, costs grow as planned. This is the plan.
Downside. Revenue flat or declining, costs as planned until a defined decision point. This tells you the latest moment you must act.
Upside. Revenue beats plan. Useful for knowing when you can accelerate, and for recognising that growth consumes cash too — more customers mean more infrastructure, more support and often more upfront acquisition cost.
Run them monthly for eighteen months. Quarterly granularity hides the month when three annual renewals land together.
How much buffer
The conventional guidance is to start raising with twelve months of runway, because a round commonly takes four to six months from first meeting to cash in the bank, and that assumes it goes well.
Starting at six months means raising from a position of visible weakness. Investors notice, terms reflect it, and the risk of running out during the process is real.
For a company that will not raise again, the equivalent target is a cash reserve covering several months of operating costs, and a clear view of the point at which spending must reduce.
Runway and the growth decision
Runway is the constraint that converts strategy into arithmetic.
A company with eighteen months of runway and a nine-month CAC payback period can invest in growth, because the spend returns within the window. A company with ten months of runway and a twenty-month payback is spending money it will not see again before it runs out.
This is why payback period matters more to an early-stage company than lifetime value. Lifetime value is a bet on the future; payback is a cash fact.
Extending runway
In order of speed and reversibility.
Collections. Chase overdue invoices, shorten payment terms, invoice promptly. This is cash already earned and it is frequently the fastest improvement available.
Annual prepayment. Offer a discount for paying a year upfront. Cheap financing, discussed in annual vs monthly billing.
Discretionary spend. Software subscriptions, travel, events, contractors. Reversible and usually smaller than people hope.
Hiring freeze. Not reducing cost, but stopping it from growing. Immediate and reversible.
Headcount reduction. Significant, slow to take effect because of notice and severance, and damaging to morale and capability. If it must be done, doing it once and deeply is better than three rounds.
Debt. Venture debt and revenue-based financing extend runway without dilution, and they add fixed obligations that reduce flexibility.
Reporting it
Two numbers belong in every board pack and every monthly update: current runway in months, and the date cash reaches zero on the base case.
The date is more useful than the month count because it is harder to be vague about. “We have about a year” is a comfortable sentence; “we run out on 14 March” prompts a decision.
Track the forecast against actuals each month. A forecast that is consistently optimistic is itself information about how the company plans.
The cash flow model
Runway comes out of a cash flow model, and a simple one maintained monthly beats a sophisticated one built once.
A workable structure has one row per significant cash movement and one column per month for eighteen months. Receipts split by customer cohort or by contract where they are large enough to matter. Payments split into payroll, contractors, infrastructure, software, premises, professional services and tax. A closing cash balance at the bottom of each month.
Two refinements earn their place. Model receipts on when cash arrives rather than when revenue is recognised, including realistic payment delays. And flag the months where annual payments land, because the lumpy months are the ones that catch people out.
Update it with actuals every month and keep the original forecast visible alongside. The gap between the two is the most honest feedback a founder gets about their own optimism.
Deciding when to cut
The hardest judgement in a company with shortening runway is when to reduce costs, and the common error is waiting.
Set the decision point in advance, in the downside scenario: if revenue has not reached a stated level by a stated date, the cost base reduces by a stated amount. Deciding the trigger while things are calm produces a better decision than deciding it under pressure.
Three principles if it comes to it. Cut once and deeply rather than repeatedly, because serial reductions destroy confidence and productivity more than a single larger one. Protect whatever generates revenue and whatever keeps existing customers. And communicate the reasoning plainly, because the people who remain will decide whether to stay based on whether they believe the plan.
Communicating runway internally
Founders often keep runway to themselves, which usually makes things worse rather than calmer.
A team that does not know the position cannot help with it, and people are generally better at handling a clear difficulty than an unexplained atmosphere. Senior staff in particular make worse decisions — about hiring, about spend, about their own plans — when they are guessing.
What works is sharing the position plainly at a regular cadence: current runway, what would extend it, and what the plan is. Share less detail more often rather than everything in a crisis. The companies that handle a cash squeeze well are almost always the ones where it was not a surprise.
Runway and the funding decision
Runway determines when a funding decision has to be made, not which one. A company with eighteen months has the luxury of choosing; one with five is choosing between whatever is available.
Making the choice early, while there is still time to change course, is what keeps the options open. Our comparison of bootstrapping and venture capital sets out what each path demands, and the decision is considerably easier to make with a year of runway than with three months.
Frequently asked questions
How much runway should a startup keep?
Eighteen to twenty-four months after a raise, starting the next process at around twelve. Companies not planning to raise should hold a reserve covering several months of operating costs.
Is net or gross burn the right measure?
Net burn determines runway. Gross burn shows the cost base and matters if revenue is uncertain. Report both.
Should committed revenue count?
Only when it converts to cash. A signed annual contract paid quarterly contributes a quarter at a time.
What is default alive?
A company that would reach profitability on current growth and cost trajectory before running out of cash. Knowing which side of that line you are on changes most other decisions.
