How to Visualize your Cash Runway and Burn Rate
Startups constantly need to know how long they have to maintain their business based on their funds and these two metrics directly align with that.
Let’s take a closer look at both and discuss the potential factors that impact them.
What is Cash Burn Rate?
Burn rate is the rate at which a company uses up its available cash. Burn rate feeds into your cash operating runway which we will discuss soon. It is important to know because it ultimately allows you to gauge your expenditures and longevity of operations. Typically you want to calculate your burn rate on a month to month basis as it’s good to know how much you spend monthly. There are two types of burn rate:
Gross burn rate: To calculate your gross burn rate, you would total your monthly expenses. For instance, if you spend $50,000 a month, your burn rate is $50,000 per month.
Net Burn Rate: Net burn rate takes into account your income as a company. For example, if you spend $50,000 a month but your company makes $40,000 in revenue per month, your net burn rate will be $-10,000 per month.
It is a good idea to track both types of burn rate as stakeholders typically like to look at net burn rate, but your company might benefit from tracking the gross burn rate especially if your revenue fluctuates
Factors that impact burn rate
- Layoffs: Salaries are one of the biggest expenses for any company so be sure to evaluate your talent and make sure your salary expenditures are being fully utilized. Reducing your payroll expense will help decrease your burn rate but be mindful that great talent is also worth the expense because your business needs people to grow.
- Downsizing: Another item to evaluate is just your overall expenses and what can be reduced. Are you paying for leased spaces that you don’t use often or for amenities that are not being utilized? It’s a good idea to reevaluate and see if there are any reductions you can make in your expenditures.
- Client Churn: This impacts your net burn calculation. If you have high client turnover or a big client discontinues their relationship with your business, it might have a significant impact on your net burn as it will reduce your income month over month.
What is Runway?
Runway refers to how long a company can operate before they run out of cash, also typically measured in months.
To calculate your runway, you take your total amount of available cash and divide your burn rate. For instance, if you have $200,000 available and your net burn rate is $20,000, your runway is 10 months.
Runway may be skewed month over month depending on how much revenue fluctuates but it is a key metric to be aware of when running a business.
If your runway is less than 12 months, it is usually an indicator that requires a plan of action. If you need to fundraise, be aware that it could take months to raise money so you want to be cognizant of how much time you have to raise capital and keep the business afloat.
Factors that impact runway
- Fundraising: If you decide to fundraise, this will have a big impact on your runway. It essentially gives you more money to spend which will increase the length of time you can stay in operation. Fundraising is a long and arduous process but it allows many start ups to develop the technology or hire the staff they need to grow.
- Receivables: If your runway is looking low, it might be a good time to put your efforts into collecting any overdue receivables from your customers. Make sure you stay on top of payments from clients and ensure they are paying you in a timely manner as this helps increase your available cash thus increasing your runway.
Knowing about your current cash position is just as important as your Balance Sheet and Income Statement. Without maintaining a healthy cash flow, business expenses will begin to back up and cause hardships.
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