Cash runway: how to calculate it, and what the number tells you

Cash runway is one of the most honest numbers in a business. It answers a single question: at the rate cash is going out today, how long before the bank account runs down? The number is especially useful for early-stage and project-based businesses, where profit on paper and cash in the bank can look very different.

The formula

The simple version is:

Cash runway (months) = cash in the bank ÷ net monthly burn

Two inputs: how much cash is in the bank today, and how much net cash the business consumes in a typical month. The output is in months, and it is a point-in-time estimate — it moves with every receipt and every payment.

Illustrative calculation

A business has £120,000 in the bank (illustrative). Over the last three months it has spent an average of £60,000 and received an average of £45,000, so net monthly burn is £15,000.

Runway = £120,000 ÷ £15,000 = 8 months.

Working out net monthly burn

Burn is not just the cost base. It is net cash out — what left the account minus what came in. The usual approach:

1. Pull total cash out and total cash in for each of the last three to six months from the bank account or bookkeeping tool.
2. Average the figures. Three months smooths out one-off events; six months is better if the business is seasonal.
3. Strip out one-off receipts (an investor round, a loan drawdown, an asset sale) and one-off payments (a tax catch-up, a big equipment purchase) if you want a steady-state figure.

A business that is profitable overall may still have cash going out in a given month — because it paid its quarterly VAT, bought stock, or paid a year’s insurance up front. That is why runway is more useful than profit for short-term decisions.

VAT, PAYE and corporation tax

• VAT. A VAT-registered business usually pays HMRC one month and seven days after the end of each VAT quarter. The cash sits in the account between collection and payment, which can make a quarter with no VAT payment look stronger than it is.
• PAYE. Monthly PAYE is normally due by the 22nd of the following month (electronic). This hits every month, so it shows up naturally in average burn.
• Corporation Tax. For a company with taxable profits under £1.5m, Corporation Tax is due 9 months and 1 day after the end of the accounting period. Most people run a separate corporation-tax reserve rather than let it distort monthly burn.

A quick sanity check: add up the next three months of expected tax payments and compare them to cash on hand. If a known VAT or Corporation Tax payment is close to the bank balance, headline runway may overstate the real position.

Fixed vs. variable cost base

Runway assumes burn stays flat. That is almost never true. It is worth splitting monthly costs into fixed costs (rent, core salaries, insurance, software, finance) and variable costs (freelance labour, cost of sales, marketing you can turn down). A “stress-test runway” uses the fixed-cost base only, with no revenue — the length of time the business could survive if sales stopped tomorrow.

What the number tells you

Runway	What it usually means
Under 3 months	Short-term cash management is the priority. Any decision with cash impact is normally re-examined.
3–6 months	Enough time to work on receivables, costs or new revenue, but little room for a surprise.
6–12 months	Comfortable for most owner-managed businesses.
12+ months	Strong cash position. Attention usually shifts to deployment.

These ranges are general. A fast-growing early-stage business raising investment will usually need 12–18 months.

From one number to a forecast

Runway treats burn as a flat line. A short 3-month or 6-month cash-flow forecast plots month by month: expected customer receipts, supplier payments, payroll, VAT, PAYE, loan repayments and one-offs. The forecast shows not just when cash would run out at the current trend, but also where the pinch points sit — often around a VAT quarter or a year-end tax payment.

Nella produces a 3- or 6-month cash-flow forecast from Xero, QuickBooks, Sage or FreeAgent data and will answer plain-English questions on the web, WhatsApp, ChatGPT or Claude. Interpretation and decisions on scenarios sit with a qualified accountant.

Nella provides financial information and education, not accounting or tax advice.

Work it out: Try the cash runway calculator — it runs in your browser and states the rule it applies.

Sources

• GOV.UK u2014 Pay your Corporation Tax bill
• GOV.UK u2014 Pay employers' PAYE
• GOV.UK u2014 Send a VAT Return (deadlines)

Nella provides financial information and education, not accounting or tax advice. Nella shows you the numbers. When a question needs professional judgement, such as a filing or a tax decision, Nella says so and points you to a qualified accountant.