Cash Runway: How Many Months Does the Company Have Left?

Cash runway answers one question: if nothing changes, how long can this company keep operating before it runs out of money. It is the most useful number in microcap investing and one of the easiest to get wrong, because the two inputs sit on different statements and mean different things depending on how you read them.

The two numbers

Cash on hand comes from the balance sheet, usually as a line called "cash and cash equivalents" or "cash and cash equivalents and restricted cash." Burn comes from the cash flow statement, as "net cash used in operating activities." Burn is the amount of cash the business consumes running itself, before financing and investing.

The formula is simple:

runway in months = cash and equivalents ÷ monthly operating burn

If you have a quarterly report, divide the quarterly operating cash outflow by three to get a monthly figure. Then divide cash by that monthly burn.

A worked example

Suppose a company reports $12 million of cash and equivalents. Over the last quarter it used $6 million of cash in operating activities. Monthly burn is $2 million, so runway is $12M ÷ $2M = six months. If the burn is accelerating, six months is optimistic. If the company just closed a financing after the quarter ended, the balance sheet cash figure is already stale and the true runway is longer. Both caveats are in the filings if you look.

Where people get it wrong

• Mixing up operating burn with the change in cash. The net change in cash on the statement includes financing and investing, and a company can raise money and spend it in the same quarter. Operating cash flow is the pure burn number.
• Ignoring restricted cash. Some of the "cash" line is restricted and not available to pay salaries. Read the note.
• Forgetting one-time items. A big lawsuit payment or a grant received in the quarter distorts the burn. Look at the trend across several quarters, not one.
• Treating burn as fixed. A company can cut spending. Management's own plan often says it will reduce the burn. Whether it can is a judgment call, but the option exists.
• Stopping at cash. Debt maturities and lease obligations are claims on the same pool of cash. A company with eight months of runway and a loan due in five is tighter than eight months suggests.

How to read the result

• Under six months. Tight. In this range a company usually needs to raise money or cut hard, and raising money usually means new shares. Expect dilution or a going concern disclosure.
• Six to twelve months. The financing clock is running. Watch for an S-3, an ATM, or a shelf drawdown.
• Over a year. Breathing room, unless the burn is accelerating or there is debt coming due inside the window.

Runway is not a forecast of failure. It is a countdown of a specific, measurable constraint. A company with short runway and a clear plan to fix it is a different situation from a company with short runway and no visible source of money. The filings tell you which one you are holding.

The link to going concern

When runway gets short enough and management concludes there is substantial doubt about the next twelve months, the company must say so in a going concern disclosure. That is the accounting version of the same fact. Our guide on going concern warnings covers how that disclosure is written and what it means.

The report computes runway from the company's own filings and shows it next to the cash trend, so you can see both the level and the direction.

SOURCES: company Form 10-K and 10-Q balance sheets (cash and cash equivalents) and statements of cash flows (net cash used in operating activities); SEC Investor.gov guidance on reading financial statements.