Burn Rate, Runway and Liquidity

Profit tells you whether the business model works. But survival runs on cash, and three words describe how close a company is to the edge: burn rate, runway, and liquidity. We covered why profit and cash are different animals in cash flow vs profit — here we assume you’ve got that and go straight to the numbers finance teams and boards actually watch. Foundry Manufacturing is profitable, which makes it the perfect case for seeing how even a healthy company can be squeezed by cash.

Liquidity: can we cover what’s due soon

Start with the one that bites first. Liquidity is the near-term question: can the company actually pay the bills coming due in the next weeks and months? A business is liquid when it has enough cash — plus assets that convert to cash quickly, like receivables it’s about to collect — to cover its near-term obligations: payroll, rent, suppliers, and any loan payments due soon.

Foundry shows why liquidity is separate from being profitable. It earns a solid $600,000 of net profit a year, but at any moment it holds only $0.5M of cash while owing $1.0M in accounts payable to suppliers, plus installments on its $3M bank loan. Cash on hand is less than the bills already sitting in the payables pile. Foundry stays liquid only because it’s steadily collecting its $1.5M of receivables — the cash it’s owed by customers — and turning inventory into sales. Liquidity is about timing and convertibility, not whether the business is ultimately profitable.

Burn rate: how fast the cash drains

Burn rate is how much cash a company spends beyond what it brings in, per month. A profitable Foundry normally has no burn — it generates cash. But watch what a downturn does. In scenario S1, Foundry’s sales slip 10%; because its $3M of operating costs are fixed, operating profit falls a disproportionate 40% (from $1.0M to $0.6M), and in a slump customers also pay slower, so those $1.5M of receivables arrive late while the $1.0M of payables and the loan still come due on time.

Put those together and, for a stretch, Foundry can pay out more cash than it collects. Suppose the squeeze leaves it roughly $100,000 a month cash-negative — that’s its burn rate, the speed the bank balance drains, even though the annual P&L still shows a thin profit. Burn isn’t only a startup word; any company spending faster than it collects is burning cash.

Runway: how long the tank lasts

Runway is how many months of cash the company has left at its current burn rate. The formula is as simple as it looks:

runway = cash in the bank ÷ monthly net burn

Foundry sits on $0.5M of cash. If the downturn has it burning $100,000 a month, then $0.5M ÷ $100k = 5 months of runway — five months before the account hits zero unless something changes. Runway is a countdown: when it reaches zero the company must have raised money, collected its receivables faster, or cut its spending. That’s exactly why you see firms cut costs suddenly and hard — a shrinking runway forces the issue, and reducing burn stretches the runway to buy time. (When a whole company shifts into that mode, that’s cost-cutting and restructuring in action.)

Remember: runway asks “how many months until we run out?”; liquidity asks “can we pay what’s due right now?” A profitable company like Foundry can look strong on the P&L and still hit a liquidity crunch if its cash is locked up in receivables and inventory when a big bill lands.

Burn, runway, or liquidity?

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How to use it

When a company freezes hiring or slashes spending despite looking fine, cash is usually the reason — the runway got short, or a liquidity squeeze is looming. The sharp questions are: “What’s our net burn?”, “How many months of runway does that leave?”, and “Do we have the liquidity to cover what’s due this quarter?” Even a profitable Foundry has to ask them, because its $0.5M of cash sits behind $1.0M of payables and a loan. If you ever manage a budget, remember that timing matters as much as totals: a plan that’s profitable on paper but runs the bank account dry in month five never reaches month six. Runway keeps you alive long-term; liquidity keeps the lights on this week.