Your startup’s runway is the number of months you can continue to operate before you run out of funding. Use the lightweight startup runway calculator to estimate your company’s cash runway. Or, use one of our financial model templates (below) to do a more detailed calculation.
Your runway is a VERY important part of your budgeting and planning process. It shows how fast you’re spending your cash, and shows you if you need to adjust your plans. Probably most importantly, your runway lets you know when you need to raise venture capital. Runway is measured in months, so having detail on monthly spend (historical and projected) is helpful in creating an accurate forecast.
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.
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:
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.
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:
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:
The biggest reason startups fail is running out of funding, which underscored the importance of knowing exactly how much money you have and where you are on your runway. If you’ve got questions about how to calculate your runway, please contact us.
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