Australia Cash Flow Positive Cash Burn Runway?

[davet9]

Re: Runway = Cash Reserves/Burn Rate

Hello, apologies if this seems like a silly question but I am having difficulty understanding the cash burn Runway result for a company that is making money (not losing money).

Example:

Typical calculation for finding Cash Burn Runway for loss making company:

Burn Rate = $-50,000 monthly (losing money)
Cash Reserves: $250,000
Runway = 5 months (company has 5 months before running out of cash...easy

but what does the below “Runway” number mean when company is not burning but making money. Example:

Burn Rate = $50,000 monthly (making money)
Cash Reserves: $250,000
Runway = 5 months

Does the “5 months” in second example mean company has 5 months buffer that even if not making any money over this period would not be tapping into Cash Reserves…

OR

Is the “5 months” figure in second example a completely irrelevant figure as Cash Burn Runway cannot be calculated with positive cash flow? So if result was 5 months or 50 months would make no difference?

Thank you in advance.

 

[kirby]

The second option you list is correct. The burn runway figure tells you how many months of LOSSES will use up your cash.

 

[davet9]

The second option you list is correct. The burn runway figure tells you how many months of LOSSES will use up your cash.

Thanks, sorry can you please confirm which is correct. Is it:
"Does the “5 months” in second example mean company has 5 months buffer that even if not making any money over this period would not be tapping into Cash Reserves…

OR

Is the “5 months” figure in second example a completely irrelevant figure as Cash Burn Runway cannot be calculated with positive cash flow? So if result was 5 months or 50 months would make no difference? "

Thanks again

 

[kirby]

Is the “5 months” figure in second example a completely irrelevant figure as Cash Burn Runway cannot be calculated with positive cash flow?

The above is correct

 

[davet9]

thank you, my concern is that even if a company makes just 1 dollar then any Burn or Runway ratio becomes irrelevant and does not reveal how close company is to going into Burn Rate territory. Is there a way to solve this preferably as a percentage. eg: Company XYZ has a buffer of 16% before they start to burn cash?
I think it may have something to do with Net Income to Expenses but not sure.

 

[kirby]

If burn rate was the ONLY financial statistic available, then I would agree with your concern. Fortunately, it is not. Measures like ROA and ROA and a huge list of others are used to tell you how the company is doing. Burn rate is a unique stat used when, indeed, you know the ship is sinking.
By the way, this burn rate stat is so unique it makes me wonder why your teacher even presented it. Are you taking a class called "How to run a company into the ground" ?