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

Cash runway is a single number that sits behind many planning conversations in a small business. It tries to answer one question: how many months of operating does today’s cash buy, at today’s rate of spend. This guide explains how to calculate it, which inputs to use and what the number does not say. Information only, not advice.

The formula

Cash runway (months) = Cash on hand ÷ Monthly net burn

Where:

• Cash on hand is the total available cash across operating accounts plus any readily accessible savings or sweep accounts. It is the number on the balance sheet under cash and cash equivalents.
• Monthly net burn is the average monthly cash leaving the business minus the average monthly cash arriving, measured over a recent period such as the last three months.

If net burn is zero or negative (i.e. the business is cash-generative), runway is often said to be infinite under current conditions. That label stops being useful if the pattern is seasonal.

Working out monthly net burn

Open the cash flow statement for the last three months. Add the operating cash flow and investing cash flow lines (financing activities such as new loans or owner draws are usually excluded, so the runway number reflects the business itself, not funding events). Average that figure over three months.

1. Pull the last three months of cash flow data from the accounting software.
2. Add operating cash flow and investing cash flow for each month.
3. Divide by three to get an average monthly net cash movement.
4. Flip the sign if the result is negative. The absolute value is the monthly net burn.

Some teams use a shorter window (one month) when the business is early-stage or growing fast. Others prefer six or twelve months to smooth seasonal businesses. There is no single right window; a CPA or qualified accountant can suggest a window that fits the business.

Illustrative example

Using illustrative round numbers, a SaaS business has $120,000 of cash on hand. Over the last three months, operating and investing cash flow combined was −$60,000, so monthly net burn is $20,000. Runway is $120,000 ÷ $20,000 = 6 months.

If a new monthly subscription contract adds $5,000 of cash collections per month and no additional costs, monthly net burn falls to $15,000 and runway rises to 8 months on the same $120,000 of cash. If, instead, a one-off piece of equipment costs $30,000, cash drops to $90,000 and runway at the same $20,000 burn is 4.5 months.

Why the three-month average matters

A single month’s cash flow can be misleading. Payroll runs twice a month in some businesses and once a month in others. Insurance premiums, software renewals and annual filings land in specific months. Even a well-run business sees months where net burn is $5,000 and months where it is $35,000. Averaging over three months smooths most of that out without hiding a genuine deterioration.

Variations on the metric

• Gross burn vs net burn. Gross burn ignores revenue and only looks at cash outflows. Investors sometimes prefer gross burn for early-stage startups because net burn can hide volatile revenue.
• Trailing average vs forward forecast. The formula above uses recent history. A forward runway number uses a cash flow forecast with upcoming invoices, payroll runs and tax payments.
• Operating runway vs total runway. Operating runway excludes financing activities. Total runway includes known upcoming debt repayments and dividends.

What the number does not tell you

Runway is a snapshot of today’s position at today’s spending pattern. It does not know about:

• Upcoming tax payments, including federal estimated tax, state tax and payroll tax.
• Seasonal cash cycles (a retailer’s November cash position looks different from February’s).
• Lumpy supplier bills, annual software renewals or insurance premiums.
• Covenants on existing loans or credit facilities that may trigger before cash reaches zero.

These factors are the reason runway is often read next to a 3 to 6 month forward cash flow forecast. The runway number tells the owner where today is; the forecast tells them what the next few months look like.

Reading runway in context

A business with 18 months of runway and falling revenue is in a different position from one with 6 months of runway and signed contracts starting next month. A CPA or qualified accountant will usually look at runway, the trend in monthly net burn, the sales pipeline and the accounts receivable position together.

How Nella fits in

Nella is an AI finance assistant built by the accountants at AccTek Ltd. It connects read-only to QuickBooks or Xero, computes cash runway from the business’s own numbers and sits a 3 or 6 month cash flow forecast next to it. US tax payments are not yet added to the forecast. More detail is on the cash flow forecast feature page and the profit and KPIs feature page.

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

Sources

• Federal Reserve: Small Business Credit Survey
• SBA: Manage your finances
• SEC: Beginners' guide to financial statements (cash flow statement)

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