Startup Business Runway Cash. Cotchy Bookkeeping and Accounting

Runway Cash

Startups rely on cash, but it’s also important to manage that cash effectively to avoid problems. The cash burn is the pace at which you spend down your cash reserves. It offers a way for you to measure how fast you’re going through your bank balance and helps you estimate how long your startup has before it runs out of money. This is vital for the timing of funding rounds and also how to manage costs. Understanding the two different types of cash burn, the gross burn and the net burn , can help you manage your cash.

Calculating Gross and Net Cash Burn

Cash Burn helps you see how much money you spend, especially when you’re first getting your startup off the ground and don’t have a lot of sales-generating revenue to cover your expenses. Your gross cash burn is the total amount of money you spend in a certain period, and you typically calculate it on a monthly basis. If you have $10,000 of total operating expenses each month, your gross cash burn is $10,000 because this is your actual cash outlay for operating expenses.

Your net cash burn is the difference between the revenue you take in and your expenses. This calculation comes in handy if your company already generates some revenue, because it can be a gauge to show how close your revenue is to covering your expenses. If your total expenses are $15,000 and total revenue is $8,000 for a certain period, your net burn is $7,000. If your total revenue is $20,000 with the same $15,000 in expenses, you have a profit. Traditional economy businesses with a positive net income typically don’t use the net cash burn metric, because it is more useful for startups trying to determine how long they have before they burn through the initial capital.

Understanding Your Runway

Knowing your cash burn is only useful if you apply your knowledge to long-term planning. One way to do this is to use the cash burn to calculate your runway, or the amount of time you have before you run out of cash based on how much money you have in the bank. To calculate your runway, divide your cash burn by the total cash at bank. This calculation lets you figure out how long your company has to survive on your current bank balance. If your startup has a cash burn of $5,000 per month and a cash balance of $75,000, your company can survive for 15 more months before you run out of money at your current rate.

How to Change Your Cash Burn

If your cash burn shows you’re using up your cash reserves too quickly, you may need to slow your burn rate by spending less money or increasing revenue. Continuing to spend at the high cash burn may cause you to run out of cash before you can increase your sales enough to cover your expenses. If you shift your expenses to a fixed-cost structure, you increase the risk profile of your startup, but this lets you keep more profit as your company expands and decreases your overall cash burn. You can monitor receivables by shortening your payment terms or offering additional ways for vendors to pay. You can also perform cash flow management techniques such as delaying debt payment until immediately before they’re due to maximize the amount of interest revenue you may accrue. If you are building a startup , you can also seek new investors to extend your runway.

Importance of Tracking Cash Burn

If you know your cash burn , you’re better prepared for long-term success. If your cash burn shows a rapidly diminishing runway, you may decide to put off large cash outlays, for example. Knowing your cash burn may be a motivator to cut your expenses or find ways to rapidly increase your revenue to cover the difference.

A high cash burn can also impact your startup in other ways. Venture Capitalists may think twice if your cash burn is too high. Your suppliers may tighten credit terms as your cash burn increases to protect themselves from your potential default. Although these are normal business practices, calculating your cash burn and finding your runway period gives you the information you need to plan and increase your chances of having enough cash on hand.

When you’re starting your business, tracking your cash burn is important for knowing how long your cash can last. Using quality accounting can help you track those expenses and revenue to more easily calculate cash burn and other metrics. Improve your cash flow with invoices, payments, and expense tracking.

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