Why Cash Is…and Always Will Be King

For high-growth startups, the rules of business are different: work at breakneck speed to turn an idea into a product that solves a problem and scale that formula as quickly as possible. 

The winners capture as much market share as they can and worry about profit later. 

To do this, they rely on investments from founders, angels, and institutional investors to stay afloat until the business is sold or can be run profitably. Managing cash reserves against the timeline needed to hit the metrics that justify more investment is critical. Founders need to understand how quickly they will exhaust those reserves at the current rate so they can plan for additional fundraising or accelerate the timeline to profitability. Revenue and growth are important, but without a tight hold on metrics like cash burn and runway, great companies can fall apart.

What is Cash Burn?

Early-stage businesses designed for quick growth typically spend money far ahead of the cash generated from customers — hence the term cash “burn.” It’s simply the amount of money leaving the company over a period of time. It’s usually measured monthly until cash gets tight and then smart leaders will move to weekly monitoring. The calculation is simple: 

Cash Burn = [Total Collections] – [Total Disbursements]

Collections refer to all the money coming into the business from customers, investors, grants, etc. This has nothing to do with revenue. Great sales performance is meaningless if you can’t collect. Disbursements are all the things you spend money on, like payroll, rent, insurance, contractors, professional fees, materials, etc. Again, these are not the same as accounting expenses. Revenue and expenses are accounting metrics that follow specific rules about when they show up on your financial statements. Cash is cash. Timing is irrelevant. You either have it or you don’t. 

Actual cash burn takes all money coming in and going out into consideration. However, we prefer a more nuanced calculation called Operating Cash Burn, which removes fundraising and large one-off purchases that won’t be repeated. This is the true cash needed on a regular basis to run the business. Reporting both metrics side by side adds clarity and leads to better planning. 

What is Runway?

Runway is exactly what it sounds like. It’s the time the company has left before the money runs out based on the current cash burn. It’s expressed in months and calculated as follows: 

Runway = [Total Cash Reserves] / [Cash Burn]

Total Cash Reserves are what you have in the bank today. And as we saw above, cash burn is how much is leaking out each month. If you have $500K at the end of the month and your Operating Cash Burn is $100K per month, your runway is 5 months. This is the simplest approach and good enough for a quick pulse on the business. A more sophisticated process will come from a true business forecast that accounts for future cash events (i.e., large, upfront customer collections or quarterly commission payments) that may not have occurred in the current period. 

Runway can be extended by cutting expenses or fundraising. In fact, all fundraising is just an exercise in extending runway by putting more capital into the business. But both of those options don’t turn on a dime. If you need to cut expenses, the time is now so the savings can accumulate and push out your runway. And fundraising is a process that takes time and can be unpredictable. It can be months of introductions, pitches and diligence before the new money comes in. 

Why Is It So Important?

Every founder should know these numbers cold and have them at the ready if asked. Squishy responses to runway questions make current and prospective investors nervous. There is no “right” answer but there is an “accurate” one and being able to communicate which levers can be pulled to either accelerate or slow the cash burn separate sophisticated, metric-driven founders from the rest of the pack. 

Runway is the one metric that is truly existential to the business. Miscalculate your runway and it’s lights out. 

CPM specializes in building assumptions-driven forecasting models for early-stage or VC-backed startups. We build comprehensive, repeatable management, and investor reporting that captures financial performance, key metrics, and other operational insights. We keep an eye on cash so you don’t have to. Get in touch with us today to see how we can help.