Understanding cash runway
Cash runway is the number of months your business can continue operating at its current burn rate before running out of cash. The formula is simple: cash balance divided by monthly net burn. If you have £1.2 million in the bank and burn £100,000 per month, your runway is 12 months.
The simplicity of the formula belies the complexity of managing it. Net burn fluctuates monthly. Revenue growth reduces burn over time. Seasonal patterns create temporary spikes. A single large deal can shift the runway calculation by months.
The monitoring framework
Calculate runway monthly. Use the trailing three-month average net burn to smooth out monthly fluctuations. Update immediately after any material event (large contract, unexpected cost, funding receipt).
Track the trend. Is runway extending (burn decreasing relative to cash) or contracting (burn increasing)? The direction matters more than the absolute number. Twelve months of runway that is contracting by two months per quarter is more concerning than nine months of runway that is extending.
Forecast forward. The trailing burn rate assumes the future looks like the recent past. Layer in known changes: planned hires, committed costs, expected revenue growth. This forward-looking runway is more informative than the backward-looking calculation.
Scenario-test the runway. What is the runway if revenue growth stalls? What if a major customer churns? What if the next fundraise takes twice as long as expected? These scenarios inform contingency planning.
When to raise capital
The conventional wisdom is to start fundraising when you have 12 to 18 months of runway. This accounts for the time the process takes (typically three to six months for venture rounds) and provides a buffer if the process takes longer than expected.
Start preparing at 18 months. Get your data room in order, update the financial model, and begin relationship-building with potential investors.
Begin actively fundraising at 12-15 months. This gives you six to nine months to close a round before the pressure becomes existential.
Below 9 months without a term sheet, escalate urgency. Consider bridge financing, revenue-based financing, or accelerated cost reduction to extend runway while the raise continues.
When to cut costs
Cost reduction is not a failure -- it is a capital allocation decision. The question is whether the growth you are funding with the current burn rate will generate sufficient returns before the cash runs out.
Cut early, cut once. The worst approach is repeated small cuts that create ongoing uncertainty without meaningfully extending runway. If you need to reduce costs, make a single decisive round of reductions that extends runway by at least six months.
Preserve revenue-generating capacity. Cut costs that do not directly contribute to revenue or customer retention first: excess office space, non-essential software subscriptions, nice-to-have roles. Cutting sales and customer success headcount should be a last resort because it compounds the revenue problem.
Model the impact. Before making cuts, model the effect on both runway and revenue trajectory. A cost reduction that extends runway by three months but reduces revenue growth by 20% may not improve the situation.
The decision framework
The raise-or-cut decision ultimately depends on three factors:
1. Market conditions. Is capital available at acceptable terms? In a favourable funding environment, raising may be the better choice even at earlier stages.
2. Growth trajectory. Are you demonstrating the metrics that support a valuation increase? If yes, raising dilutes less than cutting would cost in growth.
3. Unit economics. Is each additional pound of spend generating positive returns? If CAC payback is reasonable and retention is strong, funding growth makes sense. If not, capital efficiency improvements (i.e., cuts) may be needed first.