Why Understanding Your Company’s Runway is Important
If one thing has been made clear by the pandemic, it’s the importance of being prepared for the unexpected. While we can make reasonable assumptions for what the future will look like, there will always be something that can’t be predicted, and as a founder, it’s your job to make sure your company is prepared for when that happens.
Regardless of the state of the economy, it’s important to know your company’s runway and how to extend it if the need ever arises. Additionally, having a healthy runway – actual cash on hand – allows you to capitalize on new opportunities that may arise.
How to Calculate Runway
Your company’s runway is the amount of time your company can operate, given your current level of expenditure, before becoming insolvent. Calculating your company’s runway is fairly simple:
Funds available (e.g., cash in the bank) / Average monthly burn
So, for example, if you have $300,000 in the bank and your monthly burn is $30,000, your runway is 10 months.
However, changes to cash flow and expenses can impact your runway. Decreasing cash flow or increasing expenses can both shorten your runway.
Extending Your Company’s Runway
There are three main ways to extend runway – cutting expenses, increasing revenue, and raising money.
Expenses play directly into your monthly burn, so cutting expenses is the first important way to extend your company’s runway. Even if you don’t want to cut your expenses now, it’s also important to have a list of expenses that can be cut if the economy worsens, or your company has a couple worse months. There are a variety of ways to cut expenses, unique to each company. This can include cutting parts of the budget like travel and entertainment expenses or, when necessary, cutting personnel.
The second key way to extend runway is increasing revenue and putting aside a portion of that revenue towards your company’s savings. While the majority of your business’ revenue should be reinvested into the company, having a certain level of cash on hand is essential.
Finally, another way to extend runway is raising money. This can come from a myriad of options, from government grants to venture equity to bank loans to revenue-based financing.
Using Revenue-Based Financing to Extend Your Runway
Revenue-based financing allows you to lengthen your runway without diluting your company or giving up board seats. In addition, the fundraising process is shorter than that of venture equity, allowing you to stay focused on running your company. Additionally, revenue-based financing firms are less risk-averse than banks and do not necessarily require a history of profitability.