What is cash runway?

Definition

Cash runway is the number of months current cash will last if the present monthly consume continues. On the books, this is a clock built from cash and cash equivalents and that monthly pace, not a ledger account.

A pediatric clinic after a slow insurance season reads it from cash on hand divided by the current monthly drop. The question is how many months the rest will last, not how large last month's cash drop was.

It is a remaining-time reading, not a snapshot of cash by itself. The Balance Sheet shows what is on hand; this clock turns that amount into months.

Stay with months left when you read it. The monthly pace, and the cash consumed in one period, belong on other pages.

Where it shows up

Balance sheet: Related to cash on hand.

P&L: Related to whether operations will refill that cash.

Cash flow: Related to how long current cash lasts at this month's pace.

See also: Burn Rate · Cash Position · Cash Flow Forecast

When you look at your Statement of Cash Flows, a stretch of months that used cash tells you the pace to plug into this clock. The cash line on the Balance Sheet is the other input.

When the months left are many, Friday payroll and rent can be covered without a scramble. When they are few, the clinic needs collections, a slower spend, or new money before that clock runs out.

The Income Statement does not print months left. Net income can look healthy while unpaid insurance still leaves the cash line thin.

The Balance Sheet shows the cash on hand today. This reading is that amount divided by the present monthly pace.

How it works

Take the spendable cash on hand today. Divide it by the average monthly pace at which cash is being consumed.

If cash is $96,000 and the pace is $12,000 a month, months left are eight. That is the clock this page names.

Read months left in this order:

• Take the spendable cash on hand today.
• Divide by the average monthly pace at which cash is being consumed.
• Leave unpaid invoices out of the numerator until they clear.
• Recompute when the pace or the cash on hand changes.

Stay with cash already on hand. Unpaid insurance in accounts receivable is not part of the numerator until it clears.

A line of credit can extend the months left if the clinic draws it. Unused availability is not the same as cash already sitting in the operating bank account.

The pace can change. A hiring freeze or a catch-up of insurance payments will lengthen the clock; a new lease or a slow month will shorten it.

Do not treat a one-week cash spike as a new pace. Average a stretch of months that looks like the current operation, then divide.

New money from an owner or a lender raises the numerator the day it lands. It does not change the pace until operations themselves change.

This page stays on months left. The monthly pace, and the cash consumed in a single period, belong on other pages.

Example

Harbor Kids Clinic, a pediatric practice after a slow insurance season, holds $96,000 across checking and a small savings sweep. The last three months consumed cash at $12,000 a month.

Divide $96,000 by $12,000. The clock is eight months if that pace holds.

Eight months is not a promise that anything stays the same. A $24,000 insurance catch-up next month would raise cash and slow the pace at the same time.

If payroll expense of $18,000 hits Friday with no matching deposits, the numerator drops by that amount the same day. Months left fall as soon as that cash leaves.

The clinic does not post a line that says this clock. The books already hold the cash; you divide by the current monthly pace.

If the clinic drew $24,000 on a line of credit, cash would be $120,000 and the simple clock would read ten months. The extra months are borrowed, and the pace still has to be watched.

Common mix-ups

Months left are not the same as cash on hand. Cash on hand is the snapshot; this page is that snapshot turned into time.

Months left are not the same as the monthly pace of the drop. The pace is the divisor; this clock is the result.

Months left are not the same as profit. A leftover on the Income Statement does not refill the bank until patients and insurers actually pay.

Related terms

• Burn Rate: The average monthly pace at which cash is being consumed.
• Cash Burn: The net cash consumed by the business over a period.
• Cash Position: The amount of cash on hand at a given moment across all accounts.
• Cash Flow Forecast: A forward projection of cash receipts and payments.
• Free Cash Flow: Operating cash flow left after the capital spending needed to keep running.
• Liquidity: How readily the business can cover near-term obligations with available cash.
• Scenario Planning: Modeling several plausible futures to see how the numbers hold up.
• Line Of Credit: A revolving loan the business can draw on and repay as cash needs change.