How to Calculate Cash Runway for a Small Business

Sales slowed for two months, a big client is paying late, and you have a knot in your stomach because you do not actually know how long the money in the bank will last. Learning to calculate cash runway turns that vague dread into a date on the calendar, and a date is something you can plan around.

Runway is a startup word, but it fits any small business with uneven income: a design studio, a bakery, a contractor, a freelancer with three clients. Below is the formula, a worked example, the mistakes that make most runway numbers look better than they are, and what to do once you know your number.

What cash runway means and the basic formula

Cash runway is the number of months your business can keep operating with the cash it has right now, if nothing improves. The basic formula is short:

Cash runway in months = cash available divided by monthly net burn

Net burn is how much more cash goes out than comes in each month. If you spend $42,000 a month and collect $30,000, your net burn is $12,000. With $60,000 in the bank, your runway is 5 months.

If your business is cash positive, meaning more comes in than goes out, your runway is technically unlimited. That sounds great, but it is also the moment owners stop watching, which is exactly when a single lost contract can flip the sign.

How to calculate cash runway step by step

Step 1: count only cash you can actually spend

Start with your operating bank balances. Then subtract money that looks like yours but is not:

• Sales tax or VAT collected and not yet paid.
• Payroll taxes withheld from staff.
• Customer deposits for work you have not delivered.
• Any estimated income tax payment due in the next quarter.

An unused line of credit is not cash. List it separately as a backup, because a bank can reduce or freeze it exactly when you need it.

Step 2: find your real monthly burn

Do not use one month. Take the last 3 months of actual cash in and cash out from your bank statements, not your profit and loss statement. Average the net figure. Using bank data matters because profit includes invoices nobody has paid yet, while runway only cares about money that moved.

Step 3: add the lumpy costs

Annual insurance premiums, software renewals, equipment payments, quarterly taxes, a lease deposit. Spread each one across 12 months and add it to burn, or better, place each one in the actual month it lands.

Step 4: divide and then sanity check

Divide spendable cash by adjusted monthly burn. Then ask: does any month in that window have an unusual outflow big enough to end the runway early? A single $18,000 tax payment in month 3 can cut a 6 month runway down to 4.

A worked cash runway example

Here is a small marketing agency with 6 people, using real looking numbers from the last quarter.

If the owner had used the raw bank balance and ignored insurance, the answer would have been $94,000 divided by $11,000, about 8.5 months. That is almost three extra months of false comfort.

Why the average burn rate can mislead you

Most guides tell you to calculate an average burn and divide. I think that is fine as a first estimate and dangerous as a plan. Averages hide timing, and small businesses usually fail on timing, not on totals.

A landscaping company might burn $20,000 a month from November to February and be cash positive the rest of the year. An average across 12 months says it barely burns at all. A runway based on that average tells the owner in October that there is nothing to worry about, right before four hard months. That is why seasonal businesses need a different cash reserve sized for the worst stretch, not the average month.

The better approach is to stop dividing and start listing. Write down expected cash in and out week by week, and see in which week the balance crosses your minimum. Our guide to building a 13 week cash flow forecast does exactly this, and it gives you a runway date that respects when bills actually fall due.

Use the simple formula for a monthly gut check. Use the forecast for decisions.

What to do when your runway is short

As a rough guide, here is how I would read the number for a business that is not deliberately burning cash to grow:

• Over 12 months: comfortable. Review quarterly.
• 6 to 12 months: fine, but review monthly and start fixing whatever drives the burn.
• 3 to 6 months: act now. This is the window where you still have options and leverage.
• Under 3 months: emergency. Every week counts.

The fastest levers, roughly in order of speed:

1. Collect what you are owed. Overdue invoices are runway sitting in someone else's account. A polite but firm process for chasing late invoices can add weeks within days.
2. Ask for deposits. Moving new work to 30 to 50 percent upfront changes cash timing immediately.
3. Delay or cancel discretionary spending. Subscriptions, travel, non essential hires. Go line by line through the last bank statement.
4. Negotiate supplier terms. Moving from 15 day to 45 day terms with a major supplier frees a month of their invoices.
5. Arrange financing before you need it. Lenders say yes far more often to a business with 9 months of runway than to one with 6 weeks.

Cutting staff is sometimes necessary, but it is slower than people think once notice periods and final pay are included, so it rarely rescues a runway under 2 months on its own.

Frequently asked questions

What is a good cash runway for a small business?

For an established small business, 3 to 6 months of operating expenses held in cash is a common target, and seasonal businesses should aim higher. Startups that are deliberately burning cash usually target 12 to 18 months between funding rounds. The right number depends on how quickly your revenue can recover after a shock.

How often should I recalculate runway?

Monthly is enough when runway is above 12 months. Below 6 months, update it every week alongside your cash forecast. Recalculate immediately after any big change, such as losing a client or signing a new lease.

Is burn rate the same as monthly expenses?

Not quite. Gross burn is your total monthly cash spending, while net burn subtracts the cash you collect. Runway uses net burn, because incoming cash offsets what goes out. Gross burn is still useful as the worst case if revenue stopped completely.