Resources·for SMEs, portfolio companies & PE firms
Cash runway vs. covenant headroom: two different ways to run out of options
Different vocabulary, same underlying question: how much room is left before something forces a decision. A side-by-side look at both, so you can identify which one actually applies to your business.
An independent SME with no institutional debt talks about "runway." A PE-backed company with lender or investor covenants talks about "headroom." A PE fund tracking a portfolio talks about headroom too, just across eight companies instead of one. These sound like different conversations. Structurally, they're the same one: a number that tells you how much distance remains before a hard constraint, such as running out of cash or breaching a covenant, actually bites.
Knowing which version applies to you determines what you should actually be tracking, and how often.
Two metrics, side by side
no institutional debt
Cash runway
Months of cash remaining at the current burn rate, assuming no new revenue or funding arrives. The hard constraint is simple: the bank balance reaches zero.
runway = cash on hand / monthly burn
lender or investor covenants
Covenant headroom
Percentage distance between a covenant's current value and the threshold that triggers a breach, such as net debt / EBITDA, interest cover, or minimum cash, whichever applies to your facility.
headroom = ((threshold - actual) / threshold) x 100
How they actually compare
| Cash runway | Covenant headroom | |
|---|---|---|
| Question it answers | How long until we run out of cash? | How close are we to breaching a lender or investor term? |
| Who typically tracks it | Founder or owner, sometimes a part-time CFO | Company CFO, and separately the GP or lender |
| The hard constraint | Cash balance hits zero | A ratio crosses a contractual threshold |
| What happens at the limit | The business cannot pay its obligations | A formal breach event, usually triggering lender/investor rights |
| Review frequency that matters | Weekly to monthly. Cash moves fast | Monthly internally, tested quarterly against the facility |
| Gap between test and reality | None. There's no external test date, so the number is only ever as current as the last time you checked it | Tested quarterly by the facility agreement, but headroom can drift for weeks between tests with nobody formally watching |
Why they're actually the same problem
Both metrics exist for the same reason: a bank balance or a pass/fail compliance certificate is a lagging indicator. It tells you where you are today, or where you were three months ago when the certificate was signed. Runway and headroom are both attempts to turn that lagging signal into a leading one, a distance, not a snapshot, so there's still time to act before the constraint is actually hit.
Put side by side: a company with eight months of cash runway and a company with a covenant sitting at 15% headroom are in the same place. Neither is close to the hard stop today. Both are squarely in "fine for now, worth watching" territory. And both are one bad quarter away from a very different conversation, which is exactly why the number is worth tracking before it becomes urgent, not once it already is.
The practical convention in both worlds converges too: watch the trend, not just the current number. A runway that's shrinking month over month matters more than this month's figure in isolation. A covenant with falling headroom, even while still comfortably passing, is exactly the patternPE funds flag as a "watch" conditionbefore it becomes a breach.
Which one applies to you
AHQ tracks whichever number is yours
AHQ Financials calculates cash runway and covenant headroom automatically from your live financials, whichever applies to your business. If your fund uses AHQ Insights, the same figures roll up across the whole portfolio with no separate export.