The runway calculation measures how many months a company can keep operating before it runs out of cash, computed as cash on hand divided by the monthly net burn rate.
Burn rate is the pace at which a company consumes cash. Gross burn is total monthly cash spent on operations; net burn is gross burn minus the cash that comes in from revenue, and net burn is what sets runway. A company holding $2.4 million with a net burn of $200,000 per month has twelve months of runway. Because burn changes as a company hires, grows revenue, or cuts spending, runway at today's burn is a snapshot; a forecast of future burn gives the more realistic answer.
Runway is also a constraint on the budget rather than only an output of it. Among the 📝Boundary Conditions a board agrees with a CEO, target runway, such as managing burn so cash lasts 24 months at the target growth rate, limits how much the company can spend. 📝Tops Down budgeting and the 📝Base Budget then fit expenses within it, and mechanisms such as the 📝Deferred Salary Bridge Note reduce cash burn to buy extra months before the next raise.
Runway is only as reliable as the cash forecast beneath it. The 📝Integrated Financial Model (IFM) forecasts every other balance-sheet account and lets cash fall out as the plug, the approach described in 📝Don't try to forecast cash. A 13-week cash forecast adds near-term precision when a company has only a few months of cash left, as set out in 📝Two methods of cash forecasting.
I've seen the call where the controller tells the CEO the cash forecast was off by $1m, and I've experienced that kind of miss as the beginning of the end for a company. That's why we forecast the balance sheet and let cash be the plug.