Understanding Runway and Insolvency: Why Startups Need Both Nominal and Adjusted Metrics

For startups, financial management isn’t just a matter of counting how much cash remains in the bank. It involves understanding liquidity, liabilities, projected expenses, and the timing of large financial obligations. Two concepts that frequently arise in these discussions are nominal runway and adjusted runway. While these terms may sound like dry accounting jargon, they carry significant implications for a company’s survival. Understanding them—and the broader context of liquidity, insolvency, and fiduciary responsibilities—can be the difference between a strategic pivot and an abrupt shutdown.

In this post, we’ll break down key financial realities that face many high-growth startups and why board members, CFOs, and CEOs must embrace nuanced metrics to navigate uncertainty. We’ll explore the difference between nominal and adjusted runway, discuss insolvency versus illiquidity, and explain why reporting both runways can lead to more responsible decision-making.

Beyond a Single Runway Number

Runway is a common metric in startup boardrooms. It traditionally refers to how many months a company can continue operating at its current burn rate before it runs out of cash. Often, the simplest way to calculate it (which we’ll call the nominal runway) is to take the total cash on hand and divide it by the monthly net cash outflow. If you have $900,000 in cash and spend about $90,000 each month, your nominal runway is roughly 10 months.

But this simple calculation ignores a critical factor: the timing and magnitude of your liabilities. Are there large payables due in a few months? Has the company signed a loan agreement that will require a huge payment in six months? These are not small details. When big liabilities come due, they can dramatically shorten how long the business can truly operate.

This is where the adjusted runway comes into play. Adjusted runway accounts for all those looming obligations—the big debt payments, accounts payable, and other liabilities—that will reduce the amount of cash truly available for ordinary operations. By factoring these in, adjusted runway might be substantially shorter than the nominal figure. For instance, while your nominal runway might be 10 months, the presence of a large loan payment six months out could reduce the adjusted runway to eight—or even fewer—months.

Illiquidity vs. Insolvency

To understand why this difference matters, let’s define some terms that are often misunderstood:

1. Healthy: The company can meet its obligations comfortably and has a buffer for growth. It holds enough assets (and often enough cash) to pay off all obligations and still have positive equity. No immediate financial red flags appear on the horizon.
2. Illiquid: The company may not have enough readily available cash to meet its immediate debts. However, it might still have valuable assets—think real estate, machinery, or intellectual property—that could be sold or borrowed against to raise cash. Illiquidity is a timing mismatch between when cash is needed and when cash is available.
3. Insolvent: The company’s total liabilities exceed its total assets. Even if it has some cash today, on paper, it owes more than it owns. In a classic accounting sense, insolvency describes a situation where, if all debts were called in right now, the company would not be able to pay them off with its current asset base.

For established companies—like airlines with tangible airplanes, or manufacturing firms holding inventory—illiquidity and insolvency can diverge. They might be illiquid momentarily (struggling to pay this month’s bills) but still solvent because they could sell assets to raise funds. A short-term bridge loan or asset sale can resolve the cash crunch.

For startups, however, this distinction often blurs. Many young companies have few tangible assets to sell. Their “assets” often consist of intangible items: brand value, a prototype, or engineering talent. These are not easily convertible to cash in an emergency. As a result, when a startup runs out of immediate cash, it can feel like insolvency and illiquidity are one and the same event. Without substantial hard assets, a cash crunch often becomes a full-blown existential crisis.

Why Report Both Nominal and Adjusted Runway?

Nominal runway gives a snapshot of how long the company can survive if it keeps operating as it currently does, ignoring the future liabilities. It assumes a world in which large lump-sum payouts do not exist, or at least, are not an immediate concern.

Adjusted runway, on the other hand, incorporates a more realistic view. It looks ahead to major cash outflows—such as large debt repayments, big vendor invoices, or legal settlements—and includes their impact in the calculation. The result is almost always shorter, but more honest.

For the board of directors, CFOs, and CEOs, both numbers are vital. Here’s why:

1. Strategic Decision-Making:
   Reporting both runways illuminates how precarious the situation may be. Nominal runway shows how much operational time you have if conditions remain unchanged. Adjusted runway reveals the point at which major obligations will force a financial reckoning. Armed with both, leaders can decide whether to cut costs now, negotiate with creditors, or accelerate a fundraising round.
2. Fiduciary Responsibilities:
   Once a company becomes insolvent—even if it can still pay bills for a few months—directors and executives may face heightened legal scrutiny. In many jurisdictions, directors must consider creditors’ interests once insolvency looms. Continuing to incur debts in this state could potentially expose board members to personal liability. Knowing the adjusted runway clarifies the timeline to this “red zone.”
3. Investor and Stakeholder Communication:
   Presenting only a rosy, nominal runway can mislead investors and employees. By also showing adjusted runway, management demonstrates transparency, honesty, and a commitment to sound governance. This approach can preserve trust and credibility, which might be essential for future financing and negotiations.
4. Access to Bridge Financing or Refinancing:
   Startups often hope that new funding will arrive before their runway disappears. By monitoring both runway calculations, leaders can time fundraising efforts more effectively. They might choose to secure a bridge loan now, rather than waiting until the very last minute, or adjust growth plans to ensure they reach profitability before large obligations come due.

The Reality of Startup Finance

Startup life is fraught with uncertainty. The combination of rapid growth, evolving products, and aggressive scaling often leads to razor-thin margins for error. Just looking at the nominal runway—the simplistic, linear calculation—can lull executives into a false sense of security. Conversely, focusing solely on total insolvency can cause paralysis or panic, stifling potentially productive action.

The goal is to recognize the complexity of the financial situation. Yes, on paper, you might already be insolvent if your liabilities exceed your assets. But thanks to the timing of payments, you may still have months of practical operating time—time that can be used to secure new funding, cut costs, or pivot toward a more sustainable business model. Conversely, if you ignore the underlying insolvency signs and rely solely on nominal runway, you risk walking blindly into a crisis you can’t escape.

A Call to Action for Boards, CFOs, and CEOs

For those in leadership positions, understanding and utilizing both nominal and adjusted runway metrics isn’t just an accounting exercise; it’s a strategic imperative. Consider the following next steps:

• Insist on Dual Reporting: Require that your finance team calculates and presents both nominal and adjusted runway in monthly or quarterly updates.
• Scenario Planning: Use the adjusted runway to run scenarios. What if you fail to raise new capital on time? When exactly does the big debt payment come due, and how does that affect your runway?
• Communication and Culture: Make honesty about the company’s financial state part of the culture. If employees and stakeholders see that management is realistic and proactive about financial challenges, it can maintain morale and trust.
• Governance and Compliance: Consult with legal counsel and consider the implications of insolvency. If the adjusted runway shows that insolvency is already at hand, you must understand the legal duties and personal liabilities that come with continuing operations.

Conclusion

Financial management in a startup context is about more than just a number in the bank account. By distinguishing between nominal and adjusted runway, executives can gain a more accurate picture of how long the company can operate under current conditions and when looming obligations may force difficult decisions. This nuanced understanding not only informs strategy and reduces the risk of unpleasant surprises, but also helps uphold fiduciary responsibilities and maintain trust with investors, employees, and other stakeholders.

In the high-stakes world of entrepreneurship, no single metric captures the full story. Embracing both nominal and adjusted runway is a key step toward making informed, responsible decisions that give your startup the best chance of thriving—even in the face of significant financial headwinds.

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