Startup Success Requires a Clear View of Your Runway
Running a startup is like running a marathon—you have to plan your pace for the long haul or risk burning through your fuel reserves well before the finish line. In the startup world, cash is the fuel that gets you from one milemarker to the next. It’s vital to understand how long that cash will last so you can plan for your business’ next major milestone.
What Is Runway?
Runway is the amount of time, in months, a business has before it runs out of cash.
How Do You Calculate Runway?
Wondering how to make a startup runway or more importantly, how do you go about calculating it correctly? There are two ways to calculate runway. The first is to divide your total cash by your company’s average monthly net burn (the difference between cash in and cash out). The second is to divide your total cash by your company's expected future monthly burn rate. This is the recommended method for companies expecting material changes in the business, such as investments, lump sum payments, or increases in headcount or expenses.
Why Is Runway Important?
Calculating your runway can help you understand how much time your business has to achieve its next milestone before it needs a new cash injection. For reference, a startup runway should be about 15-18 months after their first fundraise.
The Challenges of Calculating Runway
Businesses evolve every day—and that includes their spending. Where your business spent money last month might be totally different than this month. Maybe you’ll need to ramp up your marketing spend to reach more buyers, or hire more engineers to build new features, or open a new office. Or maybe your videographer will crash the company drone into a billboard (again).
Too often, companies base their runway calculations on historical data that doesn’t account for contingencies or future growth. Static metrics like this can be misleading indicators of your future cash position. You might determine, based on last month's spend, that you have 18 months of cash runway, conduct business accordingly, and then find out the hard way that, due to an uptick in spending, you now have only nine months of runway left. In other words, misinterpreting your runway can be a fatal business error.
On top of that, it can be hard to predict your cash outlays, as they often look different from the expenses in your accounting records. You might pay up front for one year of software licenses, but only see 1/12 of that number in the software expense line on your P&L statement. Or maybe you accrue employee bonuses monthly, but pay them 12 months later. The point is, while a detailed understanding of every expense does exist within your company, that understanding is collective—it’s spread out over many accounts, teams, and departments. It’s hard to see the complete picture of every dollar’s activity when there are hundreds (if not thousands) of monthly transactions across multiple bank accounts, credit cards, and software platforms.
And all of the above is needed just to track the expense side of your business. What about incoming cash? For your existing customers it’s vital to know how much they owe you, how quickly they pay their invoices, and how much you have yet to collect. For new customers understanding how quickly your bookings and pipeline turn into cash collections is critical to understanding how long your runway will last.
How to Track Runway More Efficiently
Let’s be clear: Having a good grasp on your small business runway does involve understanding historic spend and collections. But it also requires projecting and planning for future spend and future collections. You should have an informed view of what’s happened historically while also factoring in what might happen next month, next quarter, or next year.
So what goes into how to calculate runway? In the past, to do this well, you needed complicated Excel models—several of them, if you want to plan for different scenarios. Not only is creating and maintaining these a huge time suck, but interpretation is usually only understood by the folks who built the model, leaving the rest of the business with no choice but to accept the models at face value.
Mosaic Can Automatically Calculate Your Runway
Oftentimes, a runway for startups is a moving target. It changes as your business changes, which is daily. To navigate it properly, you need a compass that can constantly guide you in the right direction as the landscape around you shifts.
Mosaic plugs into all of your financial systems to aggregate, categorize, and calculate your cash inflows and outflows. Not only does Mosaic automate your runway calculations and keep them up to date in real time, the software also helps you build forward-looking, scenario-based financial models which show how future plans will affect your runway.
While others are playing checkers, calculating their runway using blunt historical averages, Mosaic allows you to play chess by dynamically calculating your runway based on historical spend while also factoring in your future plans so you can understand your business as it evolves.