Startup Runway – How Do You Optimise Your Burn Rate For The Optimal Startup Runway?

Startup Runway - How Do You Optimise Your Burn Rate For The Optimal Startup Runway?

Have you ever been asked what your company’s startup runway is?

This is a common question and quite an important one because you need to know how much money you need in order for your business to survive – especially since many startups fail due to a lack of cash.

What, exactly, is your startup runway?

Your business’s startup runway is how long it will be able to survive in the market if it happens that your expenses and income remain constant.

So, it basically gives you an indication of how long you have before your company would run out of money.

It’s similar to the runways used for planes – if the runway isn’t long enough, they won’t be able to take off but if it’s too long, then it will be a waste of resources.

If your startup doesn’t have enough runway, this means it could fail.

How Long Is Your Startup Runway?

Business People Calculating

Figuring out the length of your company’s startup runway is really easy to calculate.

Take your beginning cash balance (such as $100,000) then divide it by your net burn rate (such as $7,000).

This would give you 14.2. That means you’d have 14.2 months of runway.

But how should you calculate your burn rate?

As you can see from the above calculation, your company’s burn rate is important to note. But there are two types of burn rate.

  • Gross burn rate refers to how much cash you spend every month. So, to use an example: if you have $100,000 in your business bank account and after 12 months of not adding cash to it you have $73,000 left in the account, this means you have a gross burn rate of $2,250. You’d get this number by taking $100,000 and subtracting your remaining balance of $73,000 from it before dividing that number by 12.
  • Net burn rate, which is the important one we need to figure out our startup runway length, refers to the difference between cash that’s entering your company account and cash that’s exiting it.

Medium provides a good example of how to calculate your net burn.

If you start the year with $180,000 in your account and by the end of the year you have a $30,000 cash influx, you will have a remaining cash balance of $60,000. So, your net burn rate would be $7,500 per month.

How you calculate this is by subtracting your remaining cash ($60,000) from the starting balance ($180,000) to get $120,000.

Then, $120,000 divided by 12 (for the 12 months in the year) gives you $10,000, which is your monthly burn.

With a cash boost of $30,000 over 12 months ($30,000 divided by 12), that gives you an extra $2,500 per month.

You then need to subtract this amount from your $10,000 gross burn rate to get $7,500, which is your net monthly burn.

What Should Your Startup Runway Length Be?

18 Months Cardboard

On average, most startups should have a runway length of about 18 months.

Why?

As Forbes points out, this will enable you to have about a year or so to meet your company’s milestones while also giving you a few months in which you can find your next batch of funding.

This is important because as you probably know, funding doesn’t happen overnight!

How To Optimize Your Burn Rate

Once you have calculated your runway, you might think you’re set but you’re not.

You need to keep checking and adjusting your company’s burn rate.

Let’s imagine that you’ve worked out you have a startup runway of five years.

That’s a long period of time in which you’ll be investing in resources and trying to encourage the growth of your business, so you have to recalculate things from time to time to ensure you’re still on track.

Here are some ways to optimize your company’s burn rate.

Learn How To Budget

In order to ensure that you have enough funds, you want to keep a spreadsheet of your expenses and company revenue in a macro budget.

Then, a micro budget for every company department is vital so you can plan for increased growth.

Focus on planning your money for your present and future so you can always monitor your cash flow.

It’s also a good idea to have “best-case budgets” and “worst-case budgets” so that you will be able to have funds for the worst situations that could crop up, as Forbes reports, adding that having all these budgets in place when your company is in a good place will help you to prepare for growth as well as deal with any nasty surprises.

Reduce Your Expenses

Cutting Expenses

When it comes to expenses, really think about what your company needs and consider delaying some purchases by a month or so that you don’t affect your burn rate too much.

A good rule is to spend less than 10 percent of your budget.

If it’s not business essentials, such as employee salaries and rent for office space, that require money, you shouldn’t spend over 10 percent of your business budget.

It’s always a good thing to think about how the money that would be assigned to a purchase for your business would affect your company’s net income so you can differentiate between high- and low-risk expenses.

Other ways to cut down on your expenses include the following:

  • Consider having shared office space so you don’t have to worry about high operational costs.
  • Outsource members of your team. This will help you save money that would have funded full-time resources which you might not even need. The people you hire are the engine of your business, so you need to ensure you hire the right ones with the skills your business needs. That said, avoid hiring three people who can do the job of one as that’s a waste of resources.
  • Motivate your team to use limited budgets. You should ensure that everyone in your company follows the rule of saving money. By instilling this from early on, you’ll have better success because everyone will be on the same page.

Control Your Receivables More Effectively

Receivables are the money that your clients owe you. In other words, they’re outstanding invoices.

You should be wary of the time frame you give to your clients to settle their invoices, such as if it’s 30 or 60 days so that you don’t have gaps during which no money comes in.

With that in mind, don’t delay sending invoices, set up auto payments electronically or via credit card so that your clients find it faster to make e-payments, and you could also follow up after payments are due.

What If Your Startup Runway Is Too Long?

Too Long Runway

Earlier, we mentioned that having a too long or too short runway can both pose problems.

If your startup runway is too long, you could end up wasting resources that could be put to better use.

In addition, a runway that’s too long could cause your team to become unproductive and complacent with the status quo.

That said, a slightly longer runway can have many benefits. You’ll have better funding terms when you don’t need capital.

Longer runways will also give you a bit of flexibility so you can wait for the right time to take opportunities instead of being put under pressure.

But you shouldn’t become complacent yourself, such as when it comes to your growth.

For example, if you’re not making essential purchases for your business in the hope of saving money, you could be avoiding opportunities that will help you make more profits.

You always need to remember that your startup could fail if you’re not injecting money into tasks to meet your milestones, such as investing in your customer base.

A very long runway might ensure that you won’t have a zero bank balance, but your business won’t take off, which is a problem.

Related Questions

Is it better to have a longer runway in times of uncertainty?

Having a cushion of cash is important if you’re not sure of the future of your company. Always try to raise more money than you need to have money for emergencies.

How can you lengthen your startup runway?

You can do this in various ways, such as by decreasing your costs, raising funds from your board of investors, or acquiring venture debt.

Conclusion

One of the most important things you need to know about your startup is its runway length.

This will enable you to better organize your business finances so you avoid crashing and burning.

Burn rate is crucial to your runway, and in this article we’ve shown you how to calculate it and make the most of it so you don’t run out of money or waste it on the wrong resources.

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