12. Financial Literacy for Founders: Cash Flow, Runway, and Taxes
After this lesson you can
- Read the balance sheet, income statement and cash flow statement as concepts
- Explain cash versus accrual accounting and why a profitable venture can run short of cash
- Use burn rate, runway, working capital and the cash cycle
- Build a cash model with labeled assumptions, a base case, a downside case and a sensitivity check
- Name four categories of tax obligation and write questions to bring to a local professional
- Explain restricted funds, the nonprofit starvation cycle and runway mapped to technical milestones
Video coming soon
Videos are planned to publish from December 2026.
A lesson on the money concepts every venture type needs. It explains the three financial statements, why cash flow is not profit, and how to build a simple cash model as a logic test, then covers tax categories as questions, restricted funds and milestone-based runway.
Questions and answers
Questions a learner would ask about this lesson. Think through your own answer before you open each one.
- How can a venture be profitable and still short of cash?
Show answer
Profit counts money earned; cash counts money that has arrived. In Founder B's invented case, four packages at 600 dollars earned 2,400 dollars and profit on paper was 2,250 dollars, but two clients had not paid, so only 1,100 dollars of cash was in the venture. Rent can only be paid with cash, which is why the lesson calls late payment a recognized threat to small ventures.
- What do the three financial statements each show?
Show answer
The balance sheet shows what a venture owns and owes, and what is left for the owners, at one point in time. The income statement shows income earned and expenses incurred over a period, and the resulting profit or loss. The cash flow statement shows the actual cash that came in and went out over a period.
- What is runway, and why can a simple runway number mislead?
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Runway is the number of months until cash runs out at the current net burn: cash balance divided by net monthly burn. Burn changes over time, so a one-month figure can differ from the full model. In Founder A's case, runway at the end of month two was about 5.3 months at that month's burn, yet the full model ran out of cash in month nine.
- Isn't a cash projection just a guess about the future?
Show answer
The lesson treats projections as logic tests, not predictions. A model with labeled assumptions, a base case, a downside case and a sensitivity check (changing one assumption at a time) shows which assumption does the most damage. Founder A's sensitivity check showed that payment timing alone could pull the cash run-out from month nine to month four.
- How does the course handle taxes?
Show answer
It teaches four concept categories: taxes on income or profit, employment-related contributions, sales or value-added taxes collected for the state, and withholding. Obligations depend on where you operate and sell, your legal form, your personal status and what you sell, and rules change over time. The answers belong with a local tax professional.
Practice quiz
- Question 1Which statement shows actual money moving in and out of a venture over a period?
- Question 2Runway is best defined as:
- Question 3Founder B's clients pay 60 days after work is done. This mainly affects their:
- Question 4A foundation grant to Founder C may be used only for workshop materials. This is an example of:
- Question 5According to the course, the right way to handle sales or value-added tax for a new venture is to:
- Question 6Founder B earned 2,400 dollars and incurred 150 dollars of software costs, of which 100 dollars was paid. Two clients paid 1,200 dollars. What are profit on paper and cash in the venture?
- Question 7Founder B delivers a package on day 14 and the client pays 60 days after the invoice. About how many days pass from starting work to holding cash?
- Question 8If a grant covers materials and translation at 10 dollars per family, how much does it cover for 48 families?
- Question 9What is the nonprofit starvation cycle described by Gregory and Howard?
- Question 10In Founder A's downside case, payment timing moves to 60 days, price falls to 120 dollars, and fixed costs rise to 400 dollars a month. When does cash run out?
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Entrepreneurship for Graduate Students is education, not legal, tax, financial, or immigration advice. Bring questions about your own situation to your university technology transfer office, a licensed professional, or the right campus office.