Surviving your first years in business requires carefully managing your startup runway.
According to small business failure statistics, 29% of businesses fail because they run out of cash. They don’t have enough cash flow and aren’t aware of their runway.
A clear understanding of how much money is coming in and going out is crucial for any business owner, especially startup founders.
What is Runway, and How is it Calculated?
A startup’s runway is how much time a company has to achieve profitability and become self-sustaining before running out of money. You can calculate it by dividing the company’s cash on hand (cash and cash equivalents) by the projected monthly burn rate.
The projected monthly burn rate is how much money the company expects to spend in the upcoming months. These expenses include salaries, rent, marketing, and other operating expenses.
Runway = Cash on hand / (Average Monthly Revenue – Average monthly operating expenses)
Imagine your company has $50,000 in the bank. You’re expecting $5,000 per month in revenue, and your average monthly expenses are $10,000. Your runway would be ten months because you’re burning through $5,000 of cash each month.
10 months = $50,000 / ($5,000-$10,000)
The company’s growth rate is one factor that influences the burn rate. A rapidly growing company will need more runway to sustain itself but may have more cash coming in.
How Long Should My Startup Runway Be?
The answer depends on several factors, including the stage of your business, industry, and growth rate.
A startup in the tech industry will have a different runway expectation than a restaurant. A high-growth company will need more runway than a company growing slower.
Generally speaking, 12-18 months is the norm, but this number is flexible. You’ll need to consider your particular business and situation to determine how long your runway should be.
Further, as you scale, you want to be sure you have enough cash on hand to complete the next project. Trying to fundraise and complete a project simultaneously can be overwhelming.
A short runway might also deter investors. There’s a balancing act between having enough cash to show things are under control without being so well funded it discourages them.
Tips for Extending Your Startup Runway
There are many ways to extend your runway, but they generally fall into two main categories: increasing revenue or decreasing expenses.
Several methods are very effective for achieving higher income. The most obvious way to extend your runway is to increase revenue. Bringing in more money gives you more money to spend. Rely on KPIs for insight into business performance
Customer service metrics can be a massive help for startups. KPIs (key performance indicators) help track your progress and identify areas to focus on improving. By understanding your KPIs and what impacts them, you can make changes to increase revenue.
For example, if you know conversion rates are essential to your business, you can take steps to improve your conversion rate.
If you’re unsure which KPIs to track, talk to your investors, consult with a business coach, or discuss with your accountant.
Revamp your marketing budget
When planning your budget, consider all of your options. Modern media allows for innovative ways to market your business on a tight budget, one of which is content marketing.
More sales = more incoming cash
You may be short on cash because you just aren’t charging enough.
If possible, try experimenting with adjusting your prices. Measure how your price changes affect sales volumes. This will bring in more money while still allowing you to stay competitive in your industry.
Build a more accurate budget
One effective way to decrease your expenses is to build a more accurate budget. Start with itemizing your monthly expenses and be realistic about how much you can afford. The real test is execution; the closer you stick to your budget, the better.
Reevaluate your sales channels
Another way to reduce expenses is to reevaluate your sales channels.
If you’re selling through an intermediary, you could be losing a significant portion of your profits. Consider selling directly to customers or using a different sales channel. Get rid of what’s not working and pour more into the successful ones.
Focus on efficiency
You need to focus on efficiency to reduce expenses. This applies to spending, employees, accounting processes, etc. Look for ways to reduce waste and make your business run smoother while improving your cash flow.
Don’t Let Your Startup Fail
Don’t let running out of cash be the reason your business fails.
By carefully tracking your business’s runway, you’ll know exactly how much time you have left and can focus on the most critical items. This will give you the time to raise money, increase revenue, or reduce expenses.
At Founder’s CPA, our startup experts understand a founder’s challenges when building a successful business. We can help you put these tips into action to focus on key drivers for improved cash flow and extended runway. Set up a free consultation today to see how.