Running out of cash is one of the leading causes of startup failure. If you want to make sure your business survives, it’s important to understand and extend your startup runway.
In this article, we’ll discuss what a startup runway is, how to calculate a startup runway, and ways to reduce your operating cost. With a little bit of effort, startup founders can ensure that their business has enough time and cash balance until their next fundraising round!
What is a startup runway?
A startup runway is the number of months left until it runs out of cash. It’s calculated by taking the company’s remaining cash balance and dividing it by the company’s monthly net burn rate.
This gives you an estimate of how many months the company has left before it needs to raise money again.
An important thing to keep in mind is that a startup runway can be extended by either increasing revenue or decreasing expenses.
How much startup runway do you need?
There’s no set answer to this question, as it depends on the individual business. However, a general rule of thumb is that you should have at least 12 months of runway.
This gives you enough time to make changes and adjustments to your business model without running out of cash. Moreover, it will give you enough time to prepare for your funding rounds.
Ultimately, your main goal is to have enough runway and positive cash flow to hit your next milestone.
Calculating net burn rate and startup runway
Your net burn rate is the amount of cash your startup is burning each month.
Before we dive in, it’s important to understand the difference between gross burn rate and net burn rate.
Gross Burn Rate
The gross burn rate is the total amount of cash your startup is spending each month.
Net Burn Rate
The net burn rate takes into account any revenue that the company is bringing in.
For example, if your startup has a gross burn rate of $50,000 and monthly revenue of $20,000, your net burn rate would be $30,000.
Calculating net burn rate is fairly easy, simply take your startup’s monthly operating expenses and subtract any revenue that is coming in.
Once you have your net burn rate, you can use it to calculate your startup runway! To do this, simply take your current cash reserve from all sources (bank account balance, credit line, deposits, etc) and divide it by your net burn rate.
This will give you an estimate of how many months you have left before you run out of cash.
If you have cash reserves of $100,000, this means that your startup has a runway of approximately three and a half months ($100,000 divided by $30,000).
Expenses you should include in your net burn rate calculation
Here are a few examples of the expenses you should consider when calculating your monthly gross burn rate:
- Salaries and wages
- Rent
- Utilities
- Insurance
- Taxes
- Travel expenses
- Marketing and advertising costs
- Legal fees
- Accounting fees
As you can see, there are a lot of different expenses that can impact your burn rate. Some of the expenses remain constant while others vary from month to month.
It’s important to track all of these costs carefully so that you have an accurate picture of your startup’s financial situation.
Burn rate importance
As a measure of the lack of funds available, the monthly burn rate is important when assessing the financial health and financial stability of the business. Knowing your net burn rate helps you track the amount you spend every month on your business.
This also helps to estimate the time left until a firm runs low on cash. High-growth startups often have an excess of capital throughout their early stages as their cash burn rate is high.
In the startup world, the technology industry is undergoing a long period of growth before it becomes a profitable venture. That’s why you need to keep a high level of cash balance and reduce your cash burn rate if it’s not affecting your startup growth rate.
3 Ways to Reduce Burn Rate
If your cash balance is low and you’re worried about running out of cash, there are a few things you can do to reduce your burn rate.
Revenue growth
The best way to combat a high burn rate is by growing revenue. If you can increase sales, then the cash runway will be longer because there will be more money coming in each month.
The goal for most startups should be to grow revenue as quickly as possible so that they can extend their startup runway.
Reducing costs
Another way to reduce your burn rate is by cutting costs. This can be done by reducing marketing spend, lowering salaries, or eliminating unnecessary expenses.
If you can find ways to reduce your monthly spending, you’ll be able to extend your startup’s financial runway.
Raising money
Finally, you can extend your startup’s financial runway by raising additional funding from investors. This is typically done through a process called equity financing, where many startups in the pre-revenue stage offer equity in exchange for investment.
By raising money from investors, you can fatten your cash balance to keep operating and achieve profitability.
Extending your startup runway is an important part of ensuring its success. By taking the time to understand your net and gross burn rate and ways to improve it, you can give your startup the time it needs to become profitable and avoid failure.
With a little bit of effort, you can ensure that your business has a bright future!
How to handle cash flow in a crisis?
Many startups are often experiencing cash flow difficulties, and there are a few things you can do to ease the situation. One option is to take out a short-term bank loan.
This can help you cover expenses until your startup generates revenue again. You can also look into equity crowdfunding or venture capital financing.
These options can give your startup the cash it needs to keep operating during tough times.
No startup is immune to the occasional cash flow crisis. When these situations arise, it’s important to take action quickly.
By taking out a loan or raising additional funds, you can ease the situation and give your startup the time it needs to get back on track. With a little bit of effort, you can ensure that your business weathers the storm and comes out stronger on the other side.
How do decisions impact your runway?
Every decision you make in your startup will have an impact on your cash runway. That’s why it’s so important to be thoughtful about every decision you make, big or small.
Every dollar that you spend should be carefully considered, as it could mean the difference between success and failure. When it comes to making decisions, always ask yourself how it will impact your cash runway.
If the answer is that it will shorten your runway, then you need to think twice about whether or not it’s worth it.
4 Ways to Calculate Your Burn Rate and Startup Runway
Excel or Google Spreadsheet
The easiest way to calculate your startup’s burn rate is by using a spreadsheet application like Excel or Google Sheets. Simply create a table with two columns, one for expenses and one for income.
Then, populate the table with your startup’s monthly expenses and income. Once you have all of the data entered, you can use the formulas in the spreadsheet to calculate your burn rate and startup runway.
Accounting Software
If you’re using accounting software to manage your startup’s finances, you can use it to calculate your burn rate. Most accounting software applications have built-in formulas that can help you quickly and easily calculate your startup’s burn rate.
Simply enter in your startup’s monthly expenses and income, and the software will do the rest.
Calculators
There are a number of online burn rate calculators that you can use to quickly and easily calculate your startup’s burn rate. Simply enter in your startup’s monthly expenses and income, and the calculator will do the rest.
Use finance expert like freelancer CFO
If you want to get an accurate burn rate calculation, you can hire a finance expert like a freelance CFO. They will be able to help you understand your startup’s financial situation and provide guidance on how to improve your cash flow.
FAQ
What Is A Healthy Startup Runway?
In recent years experts suggested startups should have an initial capital runway of between 12-18 months. However, recent research from Venture Capital Funds shows the numbers are low.
According to Data Analytics, startups should be able to run for between 18-21 months.
What Does A Short Startup Runway Mean?
If your startup has a short runway, it means you have less time to achieve profitability or the next milestone before you run out of money. This is often the case for early-stage startups that are still trying to find product-market fit.
In this case, you must adjust your cost structure to your cash balance.
What Is A Good Startup Burn Rate?
There’s no definitive answer, but typically, a startup should aim to keep its burn rate as low as possible. Startup founders should be lean and careful with expenses especially when they rely on investors’ funding and can’t sustain themselves independently.
Final Words
Startups need to be very mindful of their burn rate and how it will affect their cash reserves and startup runway. By understanding these concepts, startup companies and small businesses can take the necessary steps to ensure their financial stability and avoid insolvency.
With a little bit of planning and effort, your startup can achieve long-term success!
Do you have any questions about your startup runway or burn rate? Let us know in the comments below!
