Runway is the amount of time a company can operate for. If a company has a million dollars in cash and spends $100k/month, it has 10 months of runway.
In a startup, forecasting cash can be challenging. There is no clarity about the market, product-market fit, or the client base. The business does not have enough time in the market, and it also does not have enough time as a business either!
So how do you do it?
You forecast a baseline scenario that is reasonable by using:
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Hard facts
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Reasonably expected events
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Events that are more-likely-than-not to happen
A starting point would be using a hard fact: the bank account. The cash position is real and not open to interpretation. It is also the starting point.
How do you calculate money going out?
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Start with the hard facts: you must pay rent, salaries, and basic services to operate.
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If the business is growing it would be reasonable to expect purchases to increase: the forecast should reflect this.
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The hiring plan will have some key hires. Those positions will be more likely than not filled.
How do you calculate money coming in?
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We will assume there are no hard facts related to money coming in.
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Look at reasonably expected events instead: it is reasonable to get paid after you deliver your product. Check your accounts receivable schedule.
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What are more-likely-than-not events? A good example would be when the company is at the final stages of negotiating with a client. The money from the contract is more likely than not to be paid.
This baseline runway will not just sober a room, it will get you the most buy-in from your audience: you are not impossibly optimistic or unnecessarily pessimistic.
