Read TL;DR
- A cash runway is the amount of time a business can operate before running out of cash, assuming no new funding and that current spending rates remain constant. Click here to learn how it's calculated.
- For emerging startups and early-stage SaaS businesses, an 18-24 month runway is recommended due to unpredictable revenue and expenses.
- Common calculation pitfalls include underestimating expenses, overestimating revenue, and not accounting for 6-9 month fundraising timelines.
- Key metrics to track include burn rate, burn multiple, gross margin, and Rule of 40. As the burn rate increases, the cash runway decreases, and vice versa.
- Companies can extend the runway by boosting revenue, improving payment collections, optimizing working capital, and turning recurring revenue into upfront cash through annual contracts.
- Want to track your runway metrics and get real-time financial insights? Learn how Drivetrain can help streamline your financial reporting.
Just as a pilot needs enough runway to land their aircraft safely, a startup CXO, too, needs enough runway to ensure the safe landing of their business. Understanding your cash runway gives you a fair idea of how long you can keep the business up and running before you run out of cash quite literally.
Cash runway is the amount of time a business can continue to operate before it runs out of cash—assuming no new funding and spending stays at its current rate.
Whether you're scaling, navigating unexpected market trends, experiencing sudden financial challenges, or looking for new investors—knowing your runway enables you to make more strategic and informed business decisions.
This article discusses the importance of cash runway and how to calculate it for SaaS businesses (including common pain points). It also discusses ways to extend your cash runway, along with the role of technology in tracking and measuring this metric.
Table of Contents
What is a cash runway and why is it important for your startup?
Runway is the number of months a company can operate with existing cash (while spending at the same burn rate) and without requiring additional funding. What it actually means is how much VC money is a SaaS company burning. The runway begins when a company has neither made enough revenue nor secured funding.
The following factors have a big impact on your cash reserves and runway:
- Fundraising: Fresh funds, of course, increase your cash runway and help you stay afloat and manage operations.
- Operating expenses: Operating expenses are the ongoing costs a company incurs through normal business operations—meaning they can significantly limit cash resources.
- Accounts receivables and payables: The timing of payments received and made greatly impacts the cash runway. For instance, collecting long-overdue receivables improve the cash flow and add to your cash reserves. Also, extending payment terms with suppliers can help preserve cash, as needed, in the short term.
It goes without saying that a higher runway means your business is in good financial health and, as the CFO/founder, you have a good handle on its cash flow management.
Since most emerging startups and early-stage SaaS businesses do not have predictable revenue or expenses, it is recommended to have 18–24 months of runway. This allows you to focus on strategies for growth, rather than worrying about bank balance, cash burn and potential funding.
Cash runway enables startup founders and SaaS business leaders to focus on business health and growth by:
- Assessing financial health: Gain insights into your available funds (exactly how much money you have in the bank) and your burn rate.
- Improving operational efficiency: Manage resources (both personnel and funds) effectively based on current cash flow.
- Planning fundraising: Determine the optimal timing to seek additional capital.
- Controlling expenses: Identify and address overspending, as well as avoid reaching into your cash reserves.
- Building cash reserves: Recognize opportunities to redirect excess capital into your cash reserves to strengthen your financial buffer and extend your runway.
Learn more about SaaS metrics here
Key SaaS metrics to track related to runway
Monitoring key SaaS metrics helps companies maintain a healthy and longer cash runway. Here are some important cash runway-related metrics to track:
- Burn rate: It is the rate at which a new company, as yet not generating profits, spends its cash reserves. It is typically calculated in terms of the amount of cash the company is spending per month. Monitoring burn rates allows teams to forecast how long their current cash will last.
- Burn multiple: This is a capital efficiency metric created by Craft Ventures co-founder David Sacks. The burn multiple measures how many dollars a company is burning to generate an annual recurring revenue (ARR) of $1.
- Hype factor: This is another capital efficiency metric that tracks and measures how well a SaaS business utilizes the capital it has raised to generate ARR.
- Bessemer’s efficiency score: Coined by Bessemer Venture Partners, this metric measures how efficiently a SaaS company is growing. A higher score indicates more efficient use of capital, implying a longer runway.
- Bessemer’s cash conversion score (CCS): This metric is an indicator of the return on each dollar invested in a company. Bessemer created the CCS to help investors and management teams assess a company's future success and performance. Better cash management directly is a direct indicator of a longer runway.
- Bookings: Bookings are a primary indicator of future revenue growth. Strong bookings can justify current burn rates and help plan future expenses.
- Revenue: Incoming cash flow from sales or other sources can offset the burn rate. Therefore, growing revenue extends the runway.
- Gross margin: Your SaaS gross margin is simply total revenue minus cost of goods sold (COGS). Gross margin measures profitability and a higher gross profit margin generally leads to a prolonged cash runway.
- The Rule of 40: This metric helps assess the financial health and growth potential of a SaaS company. The Rule of 40 states that a SaaS company's combined revenue growth rate and profit margin should be at least 40%, enabling the business to stay profitable. This allows them to attract investors and potentially extend the runway.
Cash runway vs. burn rate
Cash runway and burn rate are closely related financial metrics. Cash runway tells how long a company can continue operating before it runs out of money, without additional income or funding. On the other hand, the burn rate tells how fast a company spends (or “burns”) each month to cover operating expenses.
Both metrics share an inverse relationship. As the burn rate increases, the cash runway decreases, and vice versa. For example, if you reduce the burn rate (by cutting costs or increasing revenue), it will extend the cash runway, and you can operate longer without additional funding.
How to calculate cash runway for your SaaS business
To calculate your cash runway, you first need to calculate your burn rate. The steps below will take you through an example with formulas you can use to figure out your own current runway.
Step 1: Calculate your burn rate
There are two types of burn rates:
- Gross burn rate: The total amount your company spends each month, regardless of incoming revenue.
- Net burn rate: The amount of cash lost each month after factoring in revenue.
Our example will use the net burn rate to calculate cash runway.
Let's say you want to calculate your SaaS startup's runway over a six-month period. You have a starting cash of $1,800,000 and an ending balance of $1,500,000.
So, for our example, we have:
Step 2: Calculate runway using current cash and net burn
Now that you have your net burn rate, you can calculate your cash runway using the following formula:
So, in our example, that would be:
Common (and potentially painful) pitfalls in calculating cash runway
Here are some common mistakes to avoid when calculating cash runway:
- Underestimating expenses: Companies often overlook hidden costs like minor subscriptions, salary raises, inflation-related cost hikes, etc. This is one of the major reasons for incorrect runway calculations. Further, even the most carefully planned budgets can get derailed due to unforeseen expenses. Unexpected market changes might require rapid pivots, and economic downturns can necessitate increased spending.
- Overestimating revenue: Another mistake startups make is that they often get carried away with their revenue projections. Accounting for only best-case scenarios in scenario planning, overlooking the impact of seasonality, or not factoring in churn rates are some of the common mistakes SaaS companies should be wary of.
- Reporting cash inflows and outflows: Calculating cash outlays can be challenging for SaaS companies. There are situations where expenses are paid upfront but recognized over time. Similarly, there are deferred revenue scenarios where cash is received in advance, but revenue is recognized incrementally.
- Not accounting for fundraising timelines: Another common oversight in runway calculations is not accounting for the time it takes to raise additional funding. This mistake often involves underestimating the length of the fundraising process, which can typically take 6-9 months, at least, from initial outreach to closing.
Tips for extending your cash runway
Here are some tips that can help SaaS business leaders extend their financial lifeline.
1. Boost revenue
There are many ways to generate additional revenue. One way is to strategically prioritize product features that can drive immediate revenue or expand the customer base. Other ways could be considering upselling opportunities or exploring new partnerships.
2. Tighten up the receivables and collections process
By improving the speed and efficiency of collecting payments, you can ensure a steadier cash flow and, thus, a longer runway. Encourage upfront payments and implement automated billing systems to collect payments faster.
3. Don't automatically fill vacant positions
By not automatically filling positions and using zero-based budgeting to evaluate whether a backfill is truly needed, companies can reduce unnecessary costs, thus extending their cash runway.
4. Optimize working capital
Managing working capital by cutting unnecessary expenses, reducing customer churn, and shortening sales cycles to the extent possible, can free up cash and extend the runway.
5. Cut unnecessary costs
Identifying and eliminating non-essential expenses can help extend the cash runway. Finance teams can utilize cash flow forecasting tools to forecast future expenses and revenues and also identify opportunities to reduce costs.
6. Turn recurring revenue into extra runway
Recurring revenue can be turned into extra runway by offering discounts for annual or multi-year contracts paid upfront or using forecasted recurring revenue to negotiate better terms with suppliers or lenders.
7. Leverage customer intelligence
You can use business analytics to gain insights into your customers' behavior, preferences, and usage patterns, and devise strategies to make your cash go further. These include usage-based pricing, hybrid pricing, annual upfront payments, and multi-year contracts.
What you stand to gain with a longer cash runway
A longer cash runway allows you to operate without raising more capital. It gives companies the flexibility to:
- Focus on growth initiatives: If there is no pressure of immediate fundraising, companies can focus on what really matters, i.e. improving product features, expanding their customer base, or entering new markets. A company with a longer runway is also positioned to be more attractive for potential partnerships.
- Withstand market fluctuations: A longer cash runway acts as a buffer during economic downturns or industry slowdowns.
- Manage strategic investments: Extra financial cushion allows teams to make informed decisions around capital investments, sales capacity planning, and tech stack.
- Streamline operations: An extended cash runway ensures SaaS businesses can operate without any stress of needing to raise more money.
Track and measure your cash runway with Drivetrain
Cash runway shows how long a VC-backed SaaS company stays in business, given its current monthly expenditures. Monitoring cash runway helps business leaders understand their financial health and determine the next round of funding required.
The runway for SaaS startups is often a moving target. To calculate it correctly, you need the right kind of SaaS financial planning software.
Drivetrain is a strategic financial planning and analysis software that seamlessly integrates with and consolidates data from all your systems and apps, including CRMs, ERPs, and HRIS, to accurately calculate all your cash inflows and outflows.
Drivetrain is powerful yet simple to use. With its user-friendly platform, you can access and analyze all the data regarding your business’ financial health and performance, and generate insights to make strategic business decisions.
Further, it offers the familiarity of spreadsheets, combined with plain English formulas, for easier calculations—but without the pain of manual errors and unwieldy spreadsheet models. Drivetrain helps you track and measure all the key metrics related to your cash runway and allows you to perform multiple what-if scenarios to arrive at the most feasible financial and cash flow forecasts.
Learn more about how Drivetrain can help you better manage your cash flows and gain control over your financial projections.
FAQs
Cash runway is important for ensuring the financial stability of a company. It is a forward-looking metric that indicates how long your cash reserves will last, given your monthly burn rate.
All the major capital efficiency metrics—such as, burn rate, burn multiple, hype factor, rule of 40, bookings—are important for tracking and measuring cash runway. Combined, these metrics express how much cash a SaaS company needs to burn for generating every new dollar of the annual recurring revenue and total revenue.
There are various ways of extending your cash runway—cutting unnecessary costs/expenses being the foremost. The other ways include raising more capital, optimizing working capital, raising debt, and bringing in higher revenue.
