What concept refers to how many months a company can operate before cash runs out?

The concept that refers to how many months a company can operate before cash runs out is known as 'runway.' This term is critical for startups, as it helps founders and investors understand the sustainability and financial health of a business. Runway is calculated by taking the amount of cash a company has on hand and dividing it by the monthly burn rate, which is the amount of cash being spent each month.

Understanding runway is essential for effective financial planning and management because it directly informs stakeholders about how long a company can continue to function at its current spending rate before it needs to either generate revenue, secure funding, or reduce expenses. A longer runway gives a startup more time to refine its products, develop a customer base, or pivot business strategies without the immediate pressure of running out of cash.

The other options, while related to financial concepts, do not specifically denote how long a company can last before cash depletion. Cash flow refers to the movement of money into and out of a business over a period, pro forma involves forecasting future financial performance, and a budget is a plan for expenses and revenues, none of which directly indicate the duration a company can continue operating without additional cash.