Cash runway vs cash buffer

It’s a known fact that many businesses fail due to poor cashflow. That isn’t new knowledge and unfortunately is a statement that will likely always ring true. This means that any metrics that provide insight into cashflow are vital for staying afloat and knowing where you actually stand. That’s where cash runway and cash buffer come in. Both are surprisingly simple to calculate and help you prepare for the unexpected.

Cash runway measures your survival time i.e. how long your business could operate for at its current burn rate before it runs out of cash.

Cash runway = current cash balance / net cash burn
Where net cash burn = monthly cash outflows - monthly cash inflows

Example: You’ve got $100,000 in the bank. Your monthly cash inflow (revenue) is $10,000 and your monthly cash outflow (expenses) is $35,000. Your net monthly burn is $25,000. That’s 4 months of runway at the current burn rate.

Cash runway is commonly used by businesses that are spending more than they're earning. These are typically startups or growing businesses that have received investment and can afford to burn cash while they build up enough revenue to be profitable. Their runway is an estimate of how long the business can keep running for without generating any new revenue to offset the higher expenditure. The shorter the runway, the more urgently businesses need to either increase revenue, reduce expenses or secure additional funding.

Cash buffer measures your safety net i.e. how long your business could operate for if revenue dried up and you had to survive purely on cash reserves.

Cash buffer = current cash balance / monthly cash outflow

Example: You’ve got $100,000 in the bank, and your monthly operating expenses are $10,000. If your revenue disappeared overnight, you’d have roughly 10 months before cash ran out.

Cash buffer is typically used by businesses that are cashflow positive. For these businesses, the runway is technically infinite (since they’re earning more than they’re spending each month), so buffer is the more useful metric. It's a helpful gauge of how long the business could operate for in a worst-case scenario where you’ve stopped generating any revenue. It's also a simple way of evaluating if your cashflow is worsening, expanding or staying steady. If your buffer shortens over time, the difference between what you're earning and spending is closing. If your buffer is getting longer, then your cashflow is strengthening and you're building a larger safety cushion.

This is where context matters.

A startup or high-growth business might be comfortable with only 3 months of runway because growth and fresh investment are imminent. On the other hand, a mature and stable business would probably aim for at least 6 months. Most healthy businesses sit somewhere between 6 and 12 months.

You could also think of these metrics a bit like you would an emergency fund. If your runway or buffer is 2 months, you’re not in crisis just yet. However, you’re definitely playing close to the edge and might be feeling the pressure to bring in more money or cut costs. If your runway or buffer is 18 months, you’ve got quite a bit of breathing room and you won’t be feeling like there’s any kind of current cashflow emergency.

When you understand your runway/buffer and how they’re trending over time, you’re in a better position to make decisions and weather any storms.

Spending lots of cash in order to grow is fine if you know you have time on your side. Likewise, a healthy buffer provides reassurance that you can cope with any setbacks (such as a delayed customer payment or slow quarter), as well as confidently invest in growth (such as hiring or expansion).

These metrics can also help with forecasting. When you know where you currently stand, you can forecast where you expect to be in 3 months or a year's time, and even model different scenarios. What if revenue grows 20%? What if a major customer disappears? What if we hire another person? What if the economy weakens?

Having this understanding of how much breathing room you have helps balance your business goals with actual financial stability.

The great news is that if you’re using accounting software like Xero, you don’t even need to calculate these metrics manually. You can access it directly in the software.

Reviewing the number and keeping track of how it changes each month is the first piece of the puzzle. The next is working out what that means for your business specifically. That’s where regular check-ins with your accountant come in. They can spot where cash might be getting stuck or help you understand which levers to pull if you need to extend your runway or buffer. On the flipside, they could also make recommendations of what to do with your cash if you feel like your runway or buffer is too long.