Cash is King - Tips to keep your eyes on your runway

Understanding burn rate and cash runway is most essential to surviving this economic crisis.

co-authored with Kazushi Okamoto

Cash runway is a metric to understand how long your company can survive going forward. To analyze your cash runway, you need to understand a concept of burn rate first.

Gross Burn Rate

Gross burn rate, or “burn”, is how much your business has spent per month. If your company begins with $100,000 cash and $30,000 at the end of the year, how to calculator your gross burn rate is:

$100,000 beginning cash balance - $30,000 remaining cash balance = $70,000

$70,000 / 12 month = $5,833.3 Monthly Gross Burn

Net Burn Rate

Net burn rate is a similar concept with gross burn rate but new cash generated during the year is considered. You start with $100,000 cash in the beginning of the year and $30,000 remains at the end of the year and if $30,000 cash is generated during year, how to calculator your gross burn rate is:

$100,000 beginning cash balance - $30,000 remaining cash balance = $70,000

($70,000 + $30,000 cash generated) / 12 month = $3,333.3 Monthly Net Burn

Cash Runway

Cash runway is a simple calculation of how long your cash is going to last you when your business is “burning” cash. If the startup has $100,000 cash and its net burn rate is $3,333.3 the calculator would be:

$10,000 cash amount / $3,333.3 = 30months

Now you know how to calculate your runway, but the next question you might have is how much runway should I raise? 

Raising too much

Securing over 3 years of cash in a fundraising round is enchanting but too long a runway might reduce pressure to perform. A startup has to find a repeatable and sustainable way of acquiring customers and generating revenue on its own. Remember: optimizing ROI that results in a successful take off is a milestone for your business. Make sure that your company doesn’t get weighed down by conserving  too much cash such that your nimble competitor flies ahead and lands at the desired destination earlier than you. 

How much runway should you maintain?

Needless to say, too short a runway is problematic. It creates too much pressure on the business. So how much runway should you keep? 18 months seems to be a comfortable buffer in people’s minds but that target should vary by industry and payback cycles of the business model. When focusing on building technology and traction for 12 months, it’s ideal to have hit targets within a year with an additional 6-month buffer, in case of delays for a variety of reasons (uncertainty is the only certainty these days), This buffer allows you to take the resulting outcome in hand to fundraise or adjust plans.

Armed with existing data from portfolio companies, Fred Wilson of Union Square Ventures says “to plan on 18 months of runway from financing and three to six months to raise the next round for years.” Chamath Palihapitiya recommends a 36 month runway during recessions like this one or be at the behest of the price-maker.

Ways to extend runway 

When the economy crashes out of the blue, your projections are thrown off completely and you need a sudden cash infusion just to stay afloat, much less catch up to your plans. Even in regular times, one of the top reasons why startups fail is running out of cash. It’s extremely important to keep your eyes on the progress on your plan to match your cash runway. There are only two ways to extend your runway: (1) Add cash and (2) Reduce burn. Here are the most timely ways to up your cash runway: 

Add cash

  • Government wage support programs

The Paycheck Protection Program is an SBA loan program as a part of the CARES Act in the United States that helps businesses keep their workforce employed during the COVID-19 crisis. All small businesses with <500 employees prior to February 15th, 2020, could be eligible for a loan up to $10 million at 4% interest rate. Loan size is based on average monthly payroll expenses for US employees in the past year. This program is a huge governmental effort in staving off unemployment, so stay tuned for evolving loan forgiveness terms. Singapore also offers a generous Job Support Scheme to employers.

  • Grants

There are grants provided by the federal or local government to provide relief to the startup industry and spur innovation Here are ones available in the United States and Singapore

  • Revenue Based Financing (RBF)

If your business is generating revenue, RBF is the way to go. It is a non-dilutive method of raising capital (retain more control!) by giving investors a percentage of the enterprise's ongoing gross revenues in exchange for the money they invested.  Hustle Flywheel provides growth help - in areas like SEO, paid acquisition and attribution, along with access to a vibrant founder community and content to give startups a leg up towards success along with financing.

  • VC Investment

If you have to raise a large amount of cash, there are VCs still looking for opportunities to invest in these times. Eric Bahn, GP at Hustle fund tells all in this webinar, recommending angel investors over VCs. Also arm yourself with a post-COVID-19 strategy and slide in your deck as this is a sure question from investors.

Reduce burn

  • Be ruthless in your review of expenses

Take a close look at your budget and cut anything non-essential and non-revenue generating (runway-extending) in the near term. With remote work being the new normal, you might want to terminate your lease or negotiate with your landlord to lower rent. You might consider changing your monthly payment play to an  annual plan. 

  • Negotiate, negotiate, negotiate

Talking to your vendors could be a good idea. Vendors would like to keep you as a customer rather than losing you entirely. Just give it a shot and even if they don’t provide a discount, you can remain a customer. There is no risk in starting a negotiation.

  • Cut payroll

This is always painful and hopefully, other expenses can be cut first but human resource expense tends to be the majority of a company’s overhead expenses. Options available are reducing individual salaries or furloughing staff with medical benefits intact.

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