Runway: How to Calculate It and What to Do When It Shrinks

Most owners calculate runway by dividing cash by monthly burn and writing the answer on a sticky note. That number is wrong roughly 90 percent of the time, because the inputs are wrong. Real runway is a scenario plan, not a single division problem.

The April post on burn rate covered how to calculate burn. This one zooms in on what to do with that burn number once you have it, and how to keep runway from becoming the surprise that ends the business.

The Problem With One-Number Runway

The standard formula is cash divided by monthly burn. So $300,000 in the bank divided by $50,000 of burn equals 6 months. Clean math, comforting answer, frequently dangerous.

The problem is that burn is not a constant. It changes when revenue dips, when a customer churns, when a vendor raises prices, when the GST installment lands, when payroll grows. According to BDC, 60 percent of Canadian small businesses that fail cite cash flow problems as the primary cause, and most owners discovered the problem with less than 90 days of runway left. The single-number runway is exactly what hides the problem until it is too late to fix.

I worked with a $1.8M revenue services business last year that had $240,000 in the bank and $40,000 of monthly burn. On paper, 6 months of runway. We rebuilt the model with three scenarios. The downside case showed runway at 3.2 months because two of her contracts were up for renewal in July and a third had reduced scope already locked in. She had a problem in 14 weeks, not 24.

Three Scenarios, Not One Number

Build runway as three numbers, not one. The base, upside, and downside cases force you to surface assumptions you would otherwise hide from yourself.

1. Base case. Revenue, expenses, and timing exactly as they are today. No new wins, no losses, current pricing, current cost structure. This is the most likely 90-day picture.
2. Upside case. One realistic positive event lands. A pending proposal closes. A pricing increase takes effect. A bad debt clears. Pick one, model the cash impact, recalculate runway.
3. Downside case. One realistic negative event lands. The largest customer churns. Receivables stretch by 15 days. Payroll grows because of a planned hire. Pick one, model the cash impact, recalculate runway.

The honest runway is the downside number. That is the one you plan against. The base case is the expected story. The upside case is the bonus, not the plan.

Operating Runway Versus Bridge Runway

This distinction saves businesses. Operating runway is how long you can survive on cash and current operations alone. Bridge runway is how long you can survive if you draw on committed credit, defer owner pay, or close a known deposit.

The two are not interchangeable. A business with $100,000 cash, $40,000 burn, and a $200,000 unused line of credit has 2.5 months of operating runway and 7.5 months of bridge runway. Telling yourself you have 7.5 months is fine if the line is committed and the bank cannot call it. If it is a demand facility, the bank can pull the line the day they get nervous, which is exactly when you need it.

The CFO Perspective

"Runway is a deadline, not a number. Once you put a date on the calendar, the decisions you have been avoiding for 6 months become decisions you make this week." Peter Xia, CPA

One of my clients, a $3M revenue product business, had what looked like 9 months of runway in January. By the time we finished the scenario model, the downside case showed cash going negative the week of August 22. She had three options: cut $14,000 of monthly burn, accelerate $90,000 of receivables, or raise $150,000 of capital. We picked option one because it was inside her control and the cheapest. Runway extended from 5.5 months downside to 9 months downside in three weeks.

The scenario work did not change reality. It exposed reality. The cuts were always available, but without a specific date attached, they were always next quarter's problem.

How to Extend Runway When It Tightens

1. Cut variable costs first. Software you can pause, contractors you can defer, marketing tests you have not validated. Aim for 15 percent of monthly burn within 14 days.
2. Renegotiate vendor terms. A vendor on net 15 moved to net 45 is a 30-day cash injection on every recurring invoice. Ask explicitly, do not assume.
3. Accelerate receivables with a 1.5 to 2 percent early-pay discount. The math works out to roughly an 18 to 24 percent annualized cost of capital, which is cheaper than emergency credit.
4. Defer owner draws or salary for 90 days if cash gets under 4 months. Document the deferral as a shareholder loan so you can repay yourself when cash recovers.
5. Talk to your bank before runway drops below 90 days, not after. Banks lend to businesses that look healthy, not businesses that need a lifeline. The conversation at month 5 is different from the conversation at month 2.
6. Cut fixed costs only when variable cuts are exhausted. Office space, salaried headcount, long-term contracts. These cuts take 30 to 60 days to show up in cash, so start them before you need them.
7. Raise capital only as a last resort, and only with at least 4 months of runway still in the bank. Raising at 60 days of runway means raising on the lender's terms, not yours.

The Bottom Line

Runway is the single most important number a small business owner tracks. Calculate it as three scenarios, separate operating from bridge, and put a real date on the calendar so the decisions become urgent before they become impossible. If you want the runway scenario template I use with my CFO clients, book a free call at peterxiacpa.com/book.

Next step: see it in your free Instant CFO Snapshot.