What is a cash runway?
Short answer: Cash runway estimates the time until available liquidity is exhausted under stated operating and financing assumptions. A simple runway divides usable cash by average net cash burn. A stronger runway uses a dated cash forecast because inflows and payments are rarely even.
Available liquidity should distinguish unrestricted cash, restricted balances, committed facilities and facilities that remain conditional. Net burn means cash outflows less recurring cash inflows for the chosen period. Gross burn, which looks only at spending, answers a different question. Runway also differs from legal solvency: a company can show several months of average runway yet be unable to pay a large tax, payroll or debt obligation when due. The decision date should come before the exhaustion date because financing and restructuring actions need lead time.
How it works
Verify opening bank balances and remove cash that cannot be used. Select a representative burn period or, preferably, forecast receipts and payments by week or month. Separate operating burn from one-time projects and financing movements. Model base, downside and management-action cases, including collection delays, hiring, cancellation costs and facility conditions. Identify the first breach of minimum liquidity, not just the zero-cash date. Refresh the measure when contracts, headcount, working capital, capital expenditure or funding change. Track the time required for a raise, sale, refinancing or cost action and set board triggers accordingly.
Simple cash runway in months = available cash / average monthly net cash burn
Example
A company has 1,200 in bank balances, of which 150 is restricted, leaving 1,050 available. Average monthly receipts are 500 and cash payments are 650, so net burn is 150 and simple runway is 1,050 / 150 = seven months. The dated forecast shows a 300 annual insurance payment in month two. If that payment is outside the average, available cash after two months is 1,050 - 150 - 150 - 300 = 450, only three further months at the same burn. The simple average would therefore overstate decision time.
Why it matters
Runway tells management when collection, cost or financing action must begin, not how long the company can wait. The board should set minimum-liquidity triggers and review a dated downside case. Lenders consider whether facilities remain available, while investors use the schedule to size bridge funding against milestones and dilution. In a transaction, a buyer can use the same analysis to identify immediate funding needs and execution risk.
Runway is a scenario, not a promise. Average burn can conceal payment peaks, seasonality, customer defaults and termination costs. Undrawn debt may not be usable if conditions or covenants fail. Directors must separately consider applicable duties, going-concern requirements and whether liabilities can be paid as they fall due. Local legal, restructuring, employment and tax advice becomes important when liquidity is constrained. Management should not delay recognized obligations merely to extend the displayed runway.