Cash is the lifeblood of an early-stage company. Since you’re probably not turning any significant profit yet — and potentially taking losses — managing the money you have is critical. The more you can extend your cash runway, the longer you buy to figure out how to make your startup successful.
Fortunately, you’re not the first early-stage company to come up against this issue. Because cash runway management is such a common concern, you can tap into some clearly defined, tried-and-true options for slowing your burn rate.
We can help. Because our team regularly works with startups, we know what metrics and tools make a difference. Today, we want to recommend three things: cash runway management calculations to crunch, ways to extend your runway, and tools to measure it.
Key runway-related metrics
First, let’s start with some math. Don’t worry, it’s pretty simple. You can’t manage what you don’t understand, so let’s begin by calculating key metrics to measure your runway.
Burn rate
Burn rate is a metric you need for cash runway management. Basically, this measures how quickly you’re spending money over and above the money you’re bringing in. So, then, to calculate burn rate, you use the following formula:
Burn rate = Monthly expenses – Monthly revenue
Cash runway
Once you know your burn rate, it’s a lot easier to calculate your cash runway. For that, use this formula:
Cash runway = Your current cash balance / Burn rate
The result is the number of months your company can continue operating on its current trajectory before it runs out of cash.
Generally, you want, at minimum, 18–24 months of runway. That said, as investments get harder to come by, more leeway can help ease your mind — and the mind of any investors you already have. Getting to the 24–36 month range is ideal.
Burn multiple
Since we’re crunching some numbers, we want to toss another handy calculation into the mix. The burn multiple is often used to measure how well a software-as-a-service (SaaS) company does at using its cash for growth. The formula here is:
Burn multiple = Burn rate / Net new annual recurring revenue
That net new annual recurring revenue (ARR) is the total amount of new ARR over the same time period. So your new ARR for 2024 would be your ARR for 2024 minus your ARR for 2023.
In an ideal world, your burn multiple is less than 1. Anything over 3 is worth a bit of concern because it shows that you’re spending a lot of money, but it’s not yielding revenue-based returns.
That said, in your early stages, you’re more focused on creating your minimum viable product (MVP) and getting it to market than on generating revenue. As a result, your burn multiple will probably start fairly high. It’s worth starting to track now, though. That way, you can see if it’s trending downward — and indicating that you’re on the right track.
Managing components to slow burn rate and boost runway
Now that you have clarity around what factors impact your runway, let’s talk about how to better control those factors. Strong cash runway management means working on these three things:
#1: Limiting expenses
Each time your company spends money, it subtracts directly from its cash runway. That means being diligent in your cost control measures.
There are a handful of categories where things can get costly quickly:
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- Travel expenses: As a small company, you may think it’s too early for rigorous guidelines around what gets spent when your team travels. It’s not. Set clear parameters and limits so you don’t overspend there.
- Marketing: Make sure you’re closely tracking analytics on your marketing spend. If something is underperforming, reevaluate so you don’t dump money into an ineffective channel.
- Staffing: In your early stages, explore ways to get the help you need without the cost associated with a full-time hire. A fractional CFO, for example, gives you CFO-level expertise without the need for a full-fledged benefits package.
As your company works with new vendors, look for ways to manage costs there, too. Explore if the vendor is open to negotiating on their pricing, and what kind of payment terms they’ll extend. The longer, the better.
#2: Boosting revenue
Obviously, the more revenue you can bring in, the more you extend your runway. A few ideas there:
- Look for partnerships. These can be an effective way to tap into pre-built customer bases and speed sales.
- Make money off your real estate. Even if you’re leasing your office, subleasing space you don’t need helps you bring in more cash.
- Adding functionality to your product. Small additions that customers pay for can go a long way toward boosting your revenue base. If you make a software, for example, adding seats and features that come with additional monthly costs ramp up how much you can take home from your existing customers.
As you grow, remember to increase your pricing periodically, too.
#3: Increasing accessible cash
As your cash runway approaches the 18-month mark, start thinking about your next round of fundraising. The venture capital market is less active right now, so it generally takes time to secure funding. Starting early helps you keep the inflow of cash you need to keep your business on the right track.
Tools to manage cash runway
We’ve taught you how to crunch the numbers yourself, but you might not necessarily want to — or have the bandwidth to — do that regularly. Fortunately, numerous tech tools are available to help. Most tech companies start with accounting software like QuickBooks, but then gradually realize they need to build a financial model. In the early days, this could be done through Excel or Google Sheets. As the company matures, however, you may want to look into Financial Planning and Analysis (FP&A) software tools to manage your various forecasts and models more effectively.
Those include (in no particular order):
Accounting Software:
Financial Planning and Analytics (FP&A) Software
Even with the right software behind you, cash runway management can be a daunting task. Fortunately, you don’t have to sort this out on your own. Our team specializes in working with early-stage startups and we have years of experience here. We can help you monitor your burn rate, lengthen your runway, and keep your startup on the path toward growth.
To explore working with our team, contact us today. We’re here to help with tracking metrics, evaluating trends, prepping for your next round of fundraising, and more.
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