Calculate Your Startup’s Runway

There are several methods of creating a runway projection – we outline several below. The simplest uses recent historical metrics, and divides the company’s current cash position by the recent cash burn rate. A more sophisticated method involved using a financial model to create a financial plan for the startup. The best founders use both – they know how much cash is on hand and understand what will happen if the company maintains its current run rate. They also know what will happen if the company grows revenue, hiring, expenses, etc. according to plan. 

Step 1: Calculate your burn rate

The first piece of information you need is your burn rate. That’s the amount of cash your startup spends each month. There are a number of different ways to calculate this metric, including:

• Comparing monthly cash positions. Using your monthly bank account balances, you can estimate how quickly dollars are leaving the business. Don’t forget other cash accounts, like savings accounts, payment processing accounts, etc.
• Using your income statement. One way to determine how much cash you are using monthly is to simply look at the net income each month on your income statement. Remember your income statement will include accruals and capitalization, so that may not show the exact amount of cash you are using every month.
• Using your cash flow statement. Another way to calculate burn is by using your cash flow statement, which indicates the exact amount of money that your startup spends and collects during a specific period. 
• Gross burn rate is the total amount of money you spend each money, without considering any income you might earn, and it’s the most conservative way to look at this metric. It helps you estimate how much money you could outflow if revenue stopped.
• Net burn rate factors in any income your startup may generate. 

We recommend looking at burn from different perspectives as you conduct your financial planning. Whatever method you use, you’ll need to average your monthly spending over a period of time to get a burn rate. At Kruze, we have clients who use three-month and six-month averages. 

Example: You want to calculate a three-month average burn using the cash flow method. From your cash flow statement, you can see you spent $740,000 in January, $820,000 in February, and $910,000 in March. Your burn rate is (740,000+820,000+910,000)/3 = $823,333.

Step 2: Divide your current cash balance by your burn run rate

Once you’ve got your burn, you can calculate the number of months your startup can operate if your expenses and income remain consistent. Just take your current cash balance and divide it by your burn rate to see how many months you have before reaching your zero cash date. 

Example: Your startup has a $15,000,000 cash balance. So using the three-month burn rate we calculated in Step 1, we can calculate your runway: 15,000,000/823,333 = 18 months.

The second method that the best founders will use is to have a financial model that projects revenue and expenses (and working capital) for every month. The major advantages of using a detailed monthly financial model to project your cashout date/runway is that it:

• Takes into account projected changes in revenue and revenue growth
• Allows for expense changes such as major marketing expenditures, headcount additions, etc.
• Handles working capital timing
• Allows for expense reductions.

A major advantage of using a budget to project runway is that it allows for you to estimate how your cashout date changes based on expense reductions. Using your historical averages can’t accomplish that, so in a difficult situation where you are doing everything you can to preserve capital and push your cashout date further into the future.

How much runway should you have? The length of the runway your startup needs depends on the stage of your company. Early-stage companies (seed or series A) should plan to have 18 months of runway at a minimum, considering the current fundraising environment. That gives you time to make progress toward your milestones, and can also let you plan for: 

• Cash management. If you’ve raised cash you won’t need to spend for several months, you should look at treasury management strategies to earn a better yield on the funds, while keeping them liquid and safe. 
• Expense management. Make sure you’ve got a solid expense management system in place to control spending. Controlling spending is the best way to extend your runway. 
• Fundraising. When you’ve got 12 months left in your runway, you need to start planning your next fundraise. That gives you time to prepare your pitch and start scheduling meetings. If you’ve got less than six months of runway left, you need to be very close to securing your next funding round or have other options in place. 
• Venture debt. Venture debt can help a startup “bridge” to their next funding round, but it’s important to set up a venture debt loan early in your runway, while you still have significant funding available.