Cash is the most important metric for every business and is crucial is determining your startup runway.
It gives you a glimpse into the company’s overall health since the amount of cash that you have will determine your ability to go through your day-to-day activities and make the most out of any opportunity that comes your way.
But when it comes to startups, how much cash you have on hand and how much you use every month gives you the most important financing metric: time.
In its simplest form, runway, which is typically represented in months, measures how much time you have left until you can no longer sustain your operations because you’ve run out of cash.
Figure Out Your Current Runway
The basic formula for runway includes the amount of cash you currently have, plus how much you are bringing in (e.g. monthly revenue). This amount is subtracted by expenses for the same given period.
There are several different runway calculations, but they all measure the same thing: time. The most simple calculation for runway is the following:
Runway = Cash on hand + Avg monthly revenue – Avg monthly operating expenses
To give you an example, if you had $100,000 on hand + $40,000 monthly recurring revenue – $60,000 operating expenses, you would have five months of runway.
It’s one of the best metrics for guiding your decision-making as well as setting your short, medium, and long-term strategy. The example given is a straightforward calculation, but that is precisely why it is so practical to use.
3 Ways to Extend Runway
Knowing how much time you have left to take action is essential, but even more so are the steps you take. Otherwise, you’ll just be staring at the clock until you reach the point that you can no longer carry on.
Since that is not what you are looking into, here are three ways in which you can extend your startup’s runway.
Improve your cash flow
As stated at the beginning of this article, cash flow is the lifeblood of every business. So any action you can take that will impact how much cash flow you have will directly impact your overall runway. Here are the three main actions you can take.
- Increase efficiency: For example, you could refocus your marketing spend to the channels that have the highest margin. This way, you can increase your profitability.
- Increase sales: This is probably the first area where most businesses look, and for a good reason. More sales will typically mean more cash available to extend your runway.
- Cut costs: This is the least favorable option in the long term, but it may be what’s needed to stay afloat until you can find a more sustainable way to improve your cash flow.
Generate more revenue
Generating more revenue is one of the most clear-cut ways to extend your runway. However, knowing how it relates to your runway, you’ll be able to come up with a clear target of how much revenue you need to generate. And by having a concrete number to shoot for, your revenue-generating strategy can be significantly more focused, which will increase your likelihood of success.
- If you have a client-based business model, then focusing on exactly the type of clients that will generate the revenue you need is a good strategy to follow. This could mean focusing only on the higher-end clients that represent a higher revenue.
- Another option would be to make a drastic change in your pricing structure. You could change your pricing in order to increase sales, and further along, offer some kind of upsell.
Get more funding
The other option you can choose is to get more money by increasing your funding. There are several ways to increase your funding that will depend on the current stage of your startup.
- Credit and loans: These are great options if you have confidence in your sales projections or in case you come across a temporary cash crunch. They come with interests and other terms, so you need to understand all the conditions under which you will receive a loan.
- Venture capital: If you choose this route, you will look into onboarding investors. Many startups choose this route since it’s a great way to get the funds you need on beneficial terms.
- Crowdfunding: This is another option that will let you keep control of your startup and still get the funds you need. You can do this through several platforms that help your customers donate or buy your products in advance. This way, you can get the cash influx to extend your runway.
Final Thoughts
The biggest asset that any business has is, without a doubt, cash. For this reason, making sure that you keep track of it and how every business decision you make impacts it will help increase the success of your startup. If keeping track of your runway and other financial metrics is high on your priority list, click here to schedule a call with one of our CPAs. At Founder’s CPA, we understand startups, and we make your money management easier so you can focus on growing your business.
