In every start up I’ve been involved in we talk about the cash runway – and we review it very regularly. Your cash flow runway refers to the number of months your business has before it becomes insolvent, i.e. it can’t pay its bills. That might be the same time as running out of cash if the business has little on-going debt. But it could be earlier if you’ve taken credit from suppliers who need paying before you hit the wall. Unless you want to take them to the wall too!
In cash terms your runway is the amount of cash you have divided by your monthly net expenditure, everything included. This may also be called your monthly burn rate – it’s your income minus your expenditure. And if that number is negative, then you’re burning cash
For example, if you have £20,000 in the bank, your income is £3,000 per month and your expenditure is £5,000 then your monthly burn rate is £2,000 per month. Divide cash by burn rate and you’ve got 10 months of runway remaining.
The runway analogy works well for me, because the bigger the airplane (i.e. the bigger your organisation and accompanying expenses) the longer the runway to get you into the air. An Airbus A380 needs 3,000 metres of runway to get off the ground, whereas a Cessna needs about 250 metres. But you can only get two people in a Cessna!
So, you’ve got two options – get your aeroplane in the sky before the runway runs out (start making cash), or lengthen the runway. In other words it’s time to be reducing your discretionary expenses to lengthen your runway and/or planning your next round of funding.
Businesses fail, not because they can’t make a profit, but because they run out of cash.
Make sure you know your cash flow runway before you run off the end of it and into the graveyard of dead companies.
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