Guide

How to Work Out Your Cash Runway (How Many Months You Can Keep Going)

Learn to work out how many months your cash will last at the current pace, and which small changes add the most months.

What cash runway means

Cash runway is the number of months your business can pay its bills before the money in the bank runs out. It only matters when more cash goes out than comes in. If you are taking in more than you spend, you are not burning cash and the sum does not apply. It looks at cash, not profit, so a stock order counts the day you pay for it.

The sum

You need three numbers.

1. Cash on hand: what is in the business bank account and till today.
2. Cash in per month: money actually received from customers, averaged over the last three months.
3. Cash out per month: everything you actually pay: stock, materials, rent, software, postage, ads, loan payments and what you pay yourself.

Monthly burn = cash out − cash in.

Runway in months = cash on hand ÷ monthly burn.

A worked example

A small candle shop has $9,000 in the bank. Over the last three months it averaged:

• Cash in: $4,200 a month
• Cash out: stock $2,300 + fixed costs $2,400 + ads $400 + other $600 = $5,700 a month

Burn: $5,700 − $4,200 = $1,500 a month. Runway: $9,000 ÷ $1,500 = 6 months.

If nothing changes, the account is empty in six months. That is the date to plan around, not the date things feel tight.

Three ways to add months

Try each change on its own, using the same shop.

• Buy less stock. Cut the monthly stock order by $500. Burn falls to $1,000. Runway: $9,000 ÷ $1,000 = 9 months.
• Cut a cost. Drop the $400 ads that bring little. Burn falls to $1,100. Runway: $9,000 ÷ $1,100 = about 8.2 months.
• Bring in more. Sell $300 more a month in cash. Burn falls to $1,200. Runway: $9,000 ÷ $1,200 = 7.5 months.

Buying less stock adds the most months here, but only if the shelves can take it. Check your turnover and reorder point first so you do not run out of your best sellers.

Watch for timing

Cash in and cash out rarely arrive evenly. A wholesale customer may pay 30 days after delivery. A seasonal shop may make half its cash in two months. If your sales are lumpy, work out the runway with your weakest three months, not your average, and keep a note of when big bills are due.

Keep it current

Redo the sum every month. You need only three figures: bank balance, money received and money paid. A workbook that keeps orders, stock purchases and monthly totals in one place gives you those without hunting through statements.