If an Airplane overshoots the runway in an attempt to land, it most likely crashes! Same way with Startup management. If your Startup Overshoots the Runway, it crashes and out of funds means automatic death for any business.
So, you really need to keep a keen eye on your Runway!
I had a related conversation with a good friend of mine two weeks ago. I had received a worrisome email from him a few weeks earlier but I didn’t respond, so he followed up with a call. They had retrenched the whole team in my region (they are a Fintech startup in about 10 countries across 3 continents) and when I enquired, he brushed me off a bit and said it was due to Covid19 impact on their business. I queried further and he said it was decided above, that management felt they needed to protect their Runway to make sure it extends to at least till 2022. They had just raised over $40million and it would be impossible to go back to funds market, besides that would also look back on shareholders view.
Then I decided to make this small note, just a refresher especially for some young and exuberant Startup Founders.
|Cash at hand||Cash inflow||Cash outflow|
This simply means your bank balance.
o Inflow from revenue
o Inflow from investors
o Inflow from self-contribution
o Operational cost: daily expenses in the course of running the business.
o Capital cost: major capital expenses such as purchase of tools, procurement of software and hardware as well as other assets.
Simply means money spent on expenditures.
Burn = Cash inflow – Cash outflow.
Monthly income = $2,000
Monthly expense = $1,500
Monthly Burn = $2,000 – $1,500 = $500/month.
To survive as a Startup in a lean operation mode, burn rate must be kept at minimal as much as possible.
Only spend on relevant things. Focus on decisions that give you scale especially in areas of hiring staff (do more with less resources (automation is a good way to achieve scale with minimal resources).
Runway is how long your company can survive if your current income and expenses were to stay constant. The longer this period, the better the chances of survival for your startup business. Though in reality, income and expenses never remain constant.
E.g. let’s use a Burn value of $5,000/month. Assuming am a new startup and I have not started making any income, though I have a sum of $100k dollars in my bank account.
Runway = Cash at hand / Average Burn. Then my Runway = $100,000/$5,000 = 20 months.
To manage and elongate this period, companies usually raise money at different stages of the business.
This is another factor to keep your eyes on. It simply shows whether the startup is growing or regressing. To measure growth rate, see formula below.
Growth rate (%) = Revenue in month 2 – Revenue in month 1 / Revenue in month1
September revenue = $2,000
August revenue = $1,500
Growth rate = 2,000 – 1,500 /1,500 = 33%