How Much Cash Runway Should My Company Maintain?
Learn how much cash runway your company should keep, what factors affect runway, & how to use forecasting & burn rate to make smarter financial...
2 min read
Most founders assume that if their profit and loss statement shows a profit, there should be the same amount of cash in the bank. Unfortunately, that's not how accounting works.
Your P&L measures profit over a period of time. Your bank balance measures cash at a single moment. They're connected, but they're tracking different things.
Why your P&L and bank balance differ
Several common factors can create a gap between reported profit and available cash.
Revenue you've earned but haven't collected
Under accrual accounting, revenue is recognized when it's earned—not when a customer pays.
For example, if you invoice a customer for $50,000 in June but they don't pay until July, your June P&L includes that revenue even though the cash hasn't reached your bank account.
Expenses you haven't paid yet
The reverse is also true.
You may receive vendor invoices, incur payroll expenses, or owe taxes that appear on your P&L before the cash leaves your account. Those liabilities reduce profit without immediately reducing your bank balance.
Capital purchases
Buying equipment, computers, or software doesn't usually appear as an expense all at once.
Instead, those purchases reduce cash immediately while their cost is recognized gradually through depreciation or amortization. Your bank account drops, but your P&L only reflects a portion of the purchase each month.
Loan payments and financing
Borrowing money increases your bank balance but isn't revenue.
Likewise, paying back loan principal reduces cash but isn't recorded as an operating expense on your P&L. Only the interest portion affects profit.
Timing differences
Payroll timing, credit card payments, prepaid expenses, customer deposits, and tax payments can all create temporary differences between profit and cash.
None of these necessarily indicate a problem—they simply reflect the difference between accounting activity and cash movement.
What should you watch instead?
If you're trying to understand whether your business is financially healthy, don't rely on your bank balance alone.
Instead, review:
- Your P&L to understand profitability
- Your balance sheet to see what you own and owe
- Your cash flow statement to explain where cash came from and where it went
Together, these three financial statements provide the complete picture.
The bottom line
A profitable company can run out of cash, and a company with plenty of cash can report a loss. That's why growing businesses need more than a quick glance at their bank account.
Understanding the relationship between your P&L, balance sheet, and cash flow statement helps you make better operating decisions, forecast cash needs, and avoid surprises as your company grows.
Related Founder Questions
- What's the difference between cash flow and profit? (Link coming soon!)
These related, but very different concepts give you key insights into the health of the business. Coming in a future article! - Why is my company always running out of cash even though revenue is growing?
Learn the differences between cash flow and revenue, and why revenue can grow even as cash flow constricts. - Can a profitable business run out of cash?(link coming soon!)
Many growing companies are profitable on paper but still struggle to pay their bills. Here's why that happens and how to avoid it. More to come in a future article!
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