For business, “runway” is the amount of time you can keep doing business before you run out of cash. As the founder of a startup yet to achieve profitability, this is a crucial number to know and track over those critical months when you’re getting this plane off the ground.
Runway impacts your game plan, strategy, and budget. It pushes you to make smart, data-driven decisions now versus taking that wait-and-see approach that crashes so many startups.
But calculating and using your cash runway isn’t simply for startups.
Keeping tabs on your runway is critical throughout your business lifecycle. If the profit or expense forecasts in your business plan don’t align with your actuals, tracking your runway can give you a heads up that you need to change course now, seek an investor infusion, or both.
Determine Your Runway (4 Simple Steps)
Step One: Calculate Your Net Cash
Having a lot of startup capital to work with in the early months of a startup can be deceiving. When net cash goes uncalculated, it looks like your runway is far over the horizon, when it’s a lot closer than you think, and not social distancing.
Net Cash also represents your liquidity position. If you were forced to liquidate your business now, how much would you walk away with vs. how much would you owe to creditors?
If the debt exceeds cash on hand, that’s a precarious place to be because if you shuttered today, you’d still owe that money without a business to earn it.
To get this number, count up your cash on hand and subtract your credit card or other debt.
Example: $125,000 cash on hand – $25,000 credit card debt = $100,000 net cash
Step Two: Calculate Your Monthly Cash Flow
What does it cost to keep your doors open? In addition to operational and overhead expenses, you also have brand-building expenses that don’t often pay off in the short-term.
As a startup, you have a negative monthly cash flow. That’s a given. To calculate your runway, you need to know just how negative this flow is. However, this is only applicable if you’re generating revenue. Pre-launch companies can skip this step but shouldn’t neglect the other steps.
Your monthly cash flow amounts to monthly revenues minus monthly expenses.
Example: $20,000/mo revenue – $30,000 monthly expenses = -$10,000/mo
Step Three: Calculate the Runway
Now, you have the means to calculate your startup runway. But how you do it will differ between pre-revenue and revenue-generating businesses.
If you’re generating revenue, take net cash and divide it by your monthly negative cash flow amount.
Example: $100,000 net cash divided by $10,000/mo negative cash flow = 10 month runway
You have no more than ten months to reach profitability or infuse more cash (not ideal).
If you’re pre-revenue, calculate runway by taking net cash and dividing it by average monthly expenses.
Example: $100,000 net cash divided by $30,000 = 3.33 months operating expenses
In this case, you have just three months to start generating revenue. Once you begin generating revenue, you extend your runway. It’s time to recalculate runway as a revenue-generating business.
Step Four: Increase Your Runway
Once you’ve determined how much runway you have, your focus should be on extending it. The more runway you have, the greater flexibility you give yourself to take risks and grow your company.
Ways to Increase Cash Runway (and Decrease Expenses)
To increase your runway, you must tackle one or both sides of the equation. You either have to increase revenue or cut your expenses. Ideally, you want to increase revenues, of course. But there may be times when you just need to give yourself a little more runway to do that. That’s where tackling the expense side comes in.
3 Tips to Increase Revenues
- Make sure you’re tracking key performance indicators (KPI) of your business. These vary from business to business. But as an example, let’s look at Average Support Ticket Time. How quickly do you respond to customer inquiries and complaints? To grow revenues, you must ensure you’re generating happy customers who then tell their friends. You need to reduce detractors who write bad reviews that damage your revenue-generating potential.
- Employ data-driven cash management. This requires you to continually evaluate what’s working and what isn’t. Focus your energy on what’s working to increase revenues.
- Employ a rolling forecast. This requires real-time accounting and reporting, which are essential to managing your startup and increasing runway. For example, data from your sales pipeline helps you project whether next month’s revenues will increase, decrease, or stay the same. To grow revenues, you must increase your sales pipeline or the speed and efficiency with which people travel through it (possibly both).
2 Ways to Decrease Expenses
- Compare your budget to the actuals at least monthly. If you have a very short runway, you’ll need to do this on a continual basis. Identify where you’re overspending and “why” to make important decisions. Don’t automatically see an overage as a failure. Consider the why first. If that “why” increases revenues, you may need to shift spending from somewhere else. Now, that’s how to achieve data-driven growth!
- Revisit your business plan. Without a solid business plan, you’ll leak funds. That runway you think is ten months away is getting much closer. Particularly, reevaluate your sales channels and your marketing strategy. Are you spending wisely here? Or is your marketing strategy more of a shot in the dark, wasting money with no ROI? Tighten up your business plan and make sure you’re following it. This is also critical, if you are considering seeking additional investment capital. Investors want to see a solid plan.
Working with a Startup-Focused Accounting Partner
As a startup, you build your own runway. You do so by tracking key performance indicators and making data-driven decisions to not only extend the runway, but become a healthy, solid business poised for growth and expansion. Founder’s CPA specializes in helping high-growth startups calculate and maintain their runway.Are you comfortable that you know your runway and have the data to extend it? Contact us to learn how we can help.
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From FoundersCPA.com at https://founderscpa.com/how-to-calculate-runway-in-your-startup/