Cash FlowvsRunway

Cash flow is the actual money moving in and out of your business — not revenue, not profit, but real dollars in your bank account. Revenue is an accounting concept (you 'earned' $100K); cash flow is a reality concept (you 'received' $80K and 'spent' $95K, so you're $15K poorer). Companies die from running out of cash, not from unprofitability. 82% of small businesses fail due to cash flow problems, not lack of demand. The three types: Operating Cash Flow (from business activity), Investing Cash Flow (buying/selling assets), and Financing Cash Flow (debt, equity).

Runway is the number of months your startup can continue operating before it runs out of cash, assuming no change in revenue or expenses. It is the countdown clock of your business. Runway = Cash in Bank ÷ Net Monthly Burn. If you have $600K and burn $50K/month net, you have 12 months of runway. VCs expect funded startups to have 18-24 months of runway; anything under 6 months is an emergency. 29% of startups fail because they run out of cash — not because the product failed, but because the clock ran out.

The trap is confusing revenue with cash. A SaaS company booking $500K in annual contracts sounds healthy — but if those contracts are paid monthly ($42K/month), and you spent $200K this month on salaries and $100K on marketing, you're cash-flow negative by $258K THIS MONTH despite being 'profitable' on an annual basis. Enterprise SaaS is worse: Net-60 or Net-90 payment terms mean you deliver value for 3 months before receiving a single dollar. Many profitable companies have died because they couldn't cover payroll while 'waiting for invoices to be paid.'

The trap is calculating runway based on optimistic revenue projections. Founders say 'We have 12 months of runway, but revenue should grow 20%/month so we'll be fine.' Revenue projections miss targets 70% of the time. Always calculate runway assuming ZERO revenue growth — this is your 'default alive' calculation. If you can't survive on current revenue, you're 'default dead' and need to either raise money or cut costs immediately. Also, runway shrinks faster than expected because expenses creep up — tool subscriptions, infrastructure scaling, salary increases.

Calculate your monthly Operating Cash Flow: Cash Received (not revenue booked) − Cash Spent (not expenses accrued). Track the gap between revenue recognition and cash collection (DSO — Days Sales Outstanding). Target: DSO under 45 days for SaaS, under 30 for e-commerce. Build a 13-week rolling cash flow forecast: project every cash in-flow and out-flow weekly. Never rely on revenue projections — only count cash when it hits your account.

Calculate three versions of runway and review weekly: (1) Worst Case: Cash ÷ Net Burn (no revenue growth). (2) Base Case: Cash ÷ (Net Burn − Expected Monthly Revenue Increase). (3) Best Case: Cash ÷ (Net Burn − Aggressive Revenue). Manage to the Worst Case so you're never surprised. Set hard alerts: at 9 months, begin fundraising prep. At 6 months, start fundraising. At 3 months, emergency cuts.