The one thing every startup has to know and share with their investors and possibly their team is their Runway.
Runway is the amount of time a company has before they run out of money.
Obviously this is an aircraft takeoff and landing metaphor.
At any given week during the month, the CEO or founder should be able to give an accurate estimate to the board +/- a few weeks how long they have until they run out of money.
Calculated as follows;
Cash inflows – cash outflows = Burn rate per month
Cash at bank/Burn Rate per month = Runway in months (you might want to consider weeks when it gets really tight).
Note: This is a cashflow discussion, it ignores profit/loss as neither are relevant for calculating how long until you run out of money.
This might sound odd, however it is entirely possible to become insolvent while recording significant revenue growth and profit if said growth requires significant outlay with delayed incomings.
Having said that both profit and loss do drive inflows and outflows so anything you can do to simultaneously increase profit and cash inflows the more your runway will increase.
Knowing your runway is a basic requirement for any startup, there are a few reasons this is important.
As was recently illustrated with the team at Zirtual who had to close down late last week and sack 400 staff without warning which left a few people red faced including one of their Angel investors Jason Calacanis who had only interviewed them a week earlier and left the listeners feeling like the company had a lot of gas in the tank.
CEOs should be crystal clear with their investors every board meeting or sooner how long they have before they run out of cash.
Angels should know 6 months in advance when the company is due to start fund raising and when the company is dry.
If the CEO does not start raising capital 4-6 months before they are due they are almost certainly too late and unless the company is growing wildly or has done something amazing will almost certainly run out of time.
So the other reason its important to know is you need to gracefully wind down the company so as few people as possible get hurt.
Last but not least, if you don’t know when you run out of cash there is no way for you to rally the team to close those funding rounds prior to drop dead day.
I hear a lot of new entrepreneurs try to include investments yet to be received or sales yet to be booked into this equation.
Future items of a non committed nature have no place in calculating your runway.
Start calculating your Runway on a weekly basis, when you are young and cash is tight monthly or quarterly is too long to find you are going to crash soon.
Thanks to Wikipeda for the great Globemaster