Three Tips for Calculating Your Company's Cash 'Runway' Knowing how long your business can run on red is a crucial measure of its potential for success.
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Most entrepreneurs spend a lot of time on runways, but not always at the airport. Rather, they're balancing cash runways, which, loosely defined, are the amount of time or money with which they can operate in the red. For example, if a firm that's not generating revenue is burning $20,000 per month and has $100,000 in the bank, it has a "runway" of five months.
While the concept is straightforward, the reality is more complicated. Entrepreneurs must understand their personal cash runways, as well as those of their employees and the company as a whole. Knowing the length of those runways, and how to navigate them, is crucial to predicting and troubleshooting the inevitable ups and downs of starting a business.
Company cash. The most common reason for a startup to hit the end of its cash runway--when checks start to bounce--is poor cash-flow management. Founders who successfully make it out of the "valley of death" between launch and profitability do so because they keenly predict their financial needs from the start and raise cash accordingly--typically going after twice as much as they need and knowing it will take twice as long for that to materialize.