Most business owners know roughly what is in the bank. Far fewer know how long that money would actually last if the work stopped coming in.
That figure is your cash runway, and it answers a question your profit and loss account cannot. A business can be profitable on paper and still run out of money. Runway is the number that tells you how much time you have.
What cash runway actually measures
Cash runway is the number of months your business could continue operating using the cash it already has, assuming no new money comes in.
It is a stress test rather than a forecast. You are not predicting that sales will stop. You are asking a more useful question: if they did, how long would I have to react?
The basic calculation is:
Available cash ÷ monthly cash outgoings that would continue = estimated cash runway
Both halves of that sum need care, and this is where most quick calculations go wrong.
A worked example
Take a business with £24,000 in the bank.
That is the number most owners would quote. But £6,000 of it has already been set aside for VAT and other committed tax payments. That money is spoken for. It is not available to fund the business.
Bank balance: £24,000
Less committed VAT and tax: £6,000
Available cash: £18,000
Now assume the business would still need around £6,000 a month to cover the costs that continue even if new sales stopped — salaries, rent, software, insurance and other committed outgoings.
£18,000 ÷ £6,000 = 3 months
So on those assumptions, roughly three months of cash runway.
Had we used the full £24,000 bank balance, the answer would have been four months. That difference matters. It is the gap between believing you have until February and actually having until January.
Why the bank balance on its own misleads
This is the most common mistake I see. Some of the cash sitting in the account is already committed to VAT, PAYE, Corporation Tax or supplier payments falling due shortly. Counting all of it as freely available working capital makes the runway look healthier than it is.
It is worth going through the balance and separating:
- Cash that is genuinely available to the business
- Cash already earmarked for tax
- Cash committed to payments due in the next few weeks
Only the first category belongs in the top half of the calculation.
Not every cost would continue
There is a second adjustment that works in your favour.
If new sales stopped, some costs would fall as well. You would buy less stock, use fewer materials, need fewer subcontractors. So the most useful runway calculation is not based on every line in your current profit and loss account. It should focus on the cash the business would realistically continue to spend under the scenario you are testing.
That tends to mean your fixed costs plus any variable costs you are already committed to — stock already ordered, subcontractors already booked, contracts with notice periods.
If you want to go further into which of your costs would actually fall and how quickly, that is a question about your cost structure rather than your bank balance, and it is worth working through separately.
Collecting what you are owed extends the runway
Runway is not fixed. One of the fastest ways to extend it does not involve a single new sale.
Suppose the same business also has £15,000 tied up in unpaid customer invoices, and manages to collect it. Available cash rises from £18,000 to £33,000.
£33,000 ÷ £6,000 = 5.5 months
That is an extra two and a half months of breathing room. No new customer. No new borrowing. Just money that was already owed to the business arriving sooner.
This is why debtor days and cash runway are really the same conversation viewed from two angles. If your customers are slow to pay, your runway is shorter than it needs to be.
What counts as a comfortable runway?
There is no single right answer, and anyone who gives you one is guessing.
A consultancy with predictable recurring clients and few fixed commitments is in a very different position from a retailer carrying seasonal stock and a lease. A business with an agreed overdraft facility has options a business without one does not.
What matters more than hitting a particular number is knowing three things:
- What is your runway today?
- What assumptions sit behind it? Which costs did you include, and what did you treat as available cash?
- Is it getting longer or shorter?
That third question is the important one. A runway of four months is not in itself alarming. A runway that was seven months in March, five in June and four now is telling you something, and it is telling you early enough to act.
How often to check it
I would review it monthly rather than waiting until the year-end accounts are prepared. By then you are looking at a position that is up to twelve months out of date.
Monthly management accounts make this straightforward, because the figures you need — available cash, committed liabilities, monthly outgoings — are already in front of you rather than needing to be reconstructed.
Because if your runway is shortening month after month, that is something you want to know while you still have time to do something about it. Options that exist with four months of runway often do not exist with four weeks.
Where to start
If you have never calculated this, start simply:
- Take today’s bank balance.
- Subtract anything already committed to VAT, PAYE or Corporation Tax.
- Work out roughly what the business spends each month on costs that would continue regardless of new sales.
- Divide one by the other.
It will not be precise, and it does not need to be. The first calculation is about establishing roughly where you stand. The value comes from repeating it and watching the direction of travel.
Compliance is important. Understanding your numbers is where the real value lies.
If you would like help working out your own runway, or putting monthly reporting in place so the figure is always in front of you, book a consultation and we can talk it through.
