Months supported by the current cash gap
Runway divides cash on hand by monthly net burn. Net burn here is monthly operating costs minus monthly revenue, so it estimates how many months the present cash balance lasts if that gap remains unchanged. It assumes revenue is collectible and expenses occur evenly enough for a monthly model.
A 10.6-month planning horizon
With $415,000 cash, $62,000 monthly costs, and $23,000 monthly revenue, net burn is $39,000. Dividing $415,000 by $39,000 gives about 10.6 months. The result is a planning horizon, not a promise that the bank account reaches zero on that date.
Separate available cash from restricted balances
Use cash that is available for operations. Restricted balances, customer deposits that must be delivered later, and a credit facility not yet drawn need separate treatment. Monthly costs should include payroll, rent, software, debt service, and predictable taxes, rather than only vendor invoices.
Step changes make a straight-line forecast unsafe
This model becomes unreliable when spending changes in steps. A hiring plan, lease renewal, annual insurance premium, inventory buy, or revenue seasonality can move the runway by months. Build a monthly cash forecast when such events are already known.
Compare collection and cost cases
Compare several cases: current revenue, a delayed collection, and a cost-reduction plan. The difference between $39,000 and $30,000 net burn is not cosmetic: the same $415,000 supports roughly 13.8 months instead of 10.6. That is the operational question runway is designed to surface.
Work backwards from the next milestone
Runway should be dated against the next financing or profitability milestone, not treated as an abstract count. If fundraising normally takes six months and the result shows 10.6 months, the apparent cushion may be thin after diligence, legal costs, and a missed collection. Maintain a weekly forecast when the company is close to a decision point. The calculation is a useful starting ratio because it makes the cash gap visible, but a schedule of actual due dates is what prevents a surprise shortfall.
Name the action date implied by each scenario: hiring freeze, pricing change, collection push, or financing start. A runway figure matters only when it changes the timing of an actual management decision.
A runway calculation should have an owner and a review date. If collections miss their forecast, the revised cash horizon needs to be visible before commitments are made. A monthly ratio is valuable because it starts that conversation; it does not replace a dated payment schedule.
Do not treat an undrawn facility as cash until its conditions, availability date, and covenants have been checked. A financing option can extend a scenario without being usable today.
The default calculation can be stress-tested without changing the cash balance. At $62,000 of monthly costs and $23,000 of revenue, the gap is $39,000 and $415,000 supports 10.64 months. If collections fall to $15,000 while costs stay fixed, net burn becomes $47,000 and runway falls to 8.83 months. If costs are cut to $53,000 while revenue stays $23,000, net burn becomes $30,000 and runway rises to 13.83 months. These cases show why a stated revenue assumption is as important as the reported cash number.
Monthly division hides dates that can matter more than the average. A company may have enough cash for ten months on paper but face payroll on the fifth, an annual insurance premium in the sixth, and a concentrated customer collection in the seventh. A weekly forecast lists opening cash, expected collection date, committed payment date, and closing cash for each week. That schedule can reveal a shortfall even when the monthly ratio appears comfortable. The ratio is an early planning signal, not a substitute for the payment calendar.
Only funds available to run the business should enter the numerator. Restricted cash, tax held for remittance, a customer advance tied to future delivery, and an undrawn credit line have different conditions and should be shown separately. Likewise, a hiring plan or a lease step-up should be included as a dated change rather than blended into the current monthly cost. The tool assumes a steady gap; when management already knows the gap will change, the appropriate next step is a scenario forecast with those commitments explicitly scheduled.
Tie every scenario to an action date. If the conservative $47,000 gap leaves 8.83 months, the first financing, cost-reduction, or collection decision cannot wait until the eighth month: it needs lead time for diligence, notice periods, and execution. A planning sheet can name the cash-floor date, the owner, and the trigger that moves the company from a base case to a cutback case. The calculation does not prescribe the action, but it gives a disciplined way to ask when the action must be ready rather than waiting for the bank balance to force it.
Revisit the numerator immediately after a financing close, dividend, tax remittance, major purchase, or restricted-cash release, because those events change spendable cash rather than the operating gap. Revisit the denominator after a pricing change, collection delay, hiring decision, or cost contract renewal. Keeping these triggers explicit avoids a common mistake: updating the runway headline after cash changes while leaving an obsolete monthly gap underneath. A fresh ratio is only as current as both of its components.