Show pageOld revisionsBacklinksBack to top This page is read only. You can view the source, but not change it. Ask your administrator if you think this is wrong. ======Cash Runway====== Cash Runway (also known as 'Runway') is the length of time a company can continue to operate before it runs out of money, assuming its current income and expenses remain constant. Think of it as the financial fuel gauge for a business, especially for startups and other young, high-growth companies that aren't yet profitable. Just as a pilot needs to know how much fuel is left to reach a destination safely, an investor needs to know a company's Cash Runway to see if it has enough time to achieve profitability, launch a new product, or secure its next round of funding. It’s a stark, simple measure of survival. A company with a long runway has the luxury of time to navigate challenges and execute its strategy, while a company with a short runway is on a ticking clock, where every decision is critical and the pressure is immense. ===== How Do You Calculate Cash Runway? ===== Calculating the runway is refreshingly simple. It’s a quick-and-dirty health check that tells you how many months of life a company has left if things don't change. The formula is: **Cash Runway = Total Cash / Net Burn Rate** Let's break down the two components: * **Total Cash:** This is the company's readily available money. You can find this on the [[balance sheet]] under [[Cash and cash equivalents]]. It's the liquid capital the business has in the bank to pay its bills, from salaries to software subscriptions. * **Net Burn Rate:** This is the key metric. The [[Net Burn Rate]] is the net amount of cash a company is losing each month. It’s different from [[Gross Burn Rate]], which is just the company’s total monthly expenses. The net figure accounts for any cash coming in. * **Net Burn Rate = Cash Spent (Operating Expenses) - Cash Received (Revenues)** ==== A Quick Example ==== Imagine a tech startup, "Innovate Inc.," has **$1,000,000** in its bank account. * Its monthly expenses (salaries, rent, marketing, etc.) are **$150,000**. * It generates **$50,000** in revenue each month. First, we find the Net Burn Rate: $150,000 (Cash Out) - $50,000 (Cash In) = **$100,000 per month**. Now, we calculate the Cash Runway: $1,000,000 (Total Cash) / $100,000 (Net Burn Rate) = **10 months**. Innovate Inc. has 10 months to either increase its revenue, cut its costs, or find more funding before it runs out of money. ===== Why Should a Value Investor Care? ===== While often associated with venture capital and flashy startups, the Cash Runway is a vital tool for any prudent [[value investor]] analyzing a company that is not yet profitable. It’s a fundamental check on risk and management quality. ==== A Ticking Clock on Survival ==== For a company losing money, the runway is a direct measure of its [[solvency]] risk. A short runway—say, less than 12 months—is a significant red flag. It means the company is walking a financial tightrope. A [[value investor]] seeks a [[margin of safety]], and a company months away from bankruptcy has none. A longer runway provides a buffer against unexpected setbacks and gives management the time needed to steer the company toward profitability without making desperate, value-destroying decisions. ==== Assessing Management's Discipline ==== A company's burn rate is a window into the mindset of its leadership. Are they practicing disciplined [[capital allocation]], or are they burning through cash with little to show for it? A high and uncontrolled burn rate can signal a "growth-at-all-costs" mentality, which is often the enemy of long-term value creation. A prudent management team will treat its cash reserves as a precious, finite resource, striving to extend its runway by managing costs intelligently and focusing on sustainable growth. ==== The Specter of Dilution ==== When the runway shortens, a company’s options narrow. It will almost certainly need to raise more capital by issuing new stock. This is often done from a position of weakness, leading to severe [[share dilution]]. Existing shareholders find their ownership stake shrinking as new, often discounted, shares are sold to new investors. A healthy runway gives a company the power to raise capital on its own terms—or better yet, to reach profitability and not need to raise it at all, preserving value for its current owners.