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The term cash runway refers to the length of time that a company has before it exhausts its current sources of funding before it must seek additional capital. Early-stage startups estimate their cash runway by using financial forecasts or calculating the burn rate. However, one of the most common ways to calculate this period of time is by using the cash runway formula. The cash runway calculation is one of the easiest ways companies can see if they need additional funds in the coming future.
Typically, once a startup secures Venture Capital funding, Angel investment, or any other type of financing support, it can then use that money to build out its business model. The ultimate goal is to have a fully operating business and also achieve a positive cash flow. However, a business that is spending more money than it is making will have a negative cash flow. If a company continues to have a negative cash flow, they risk running out of funds. This could lead to a shutdown of operations or even bankruptcy.
The cash runway is a critical metric that shows startup companies if they are overspending. The financial runway can be calculated using the formula below:
Cash Runway = Current Cash Balance / Burn Rate
The rate at which a company is spending its cash reserves is called the burn rate, which can be calculated using the following equation:
Burn Rate = (Starting Balance – Ending Balance) / Number of Months
Typically, once early-stage startup founders calculate their cash runway, they can then decide if they need to raise additional funding, cut operational expenses, or adjust their business model. Some companies looking to extend their financial runway may do a hiring freeze, eliminate office space, or analyze their monthly cash spending to see where they can cut back.
Looking to extend and maximize your runway until your next funding round? Discover our top tips and advice with this complete guide