Across the globe an increasing number of people are jumping on the startup wave. In 2014, the Australian Securities and Investments Commission (ASIC) recorded over 207,000 company incorporations.
That’s a lot of new business ideas. To survive and grow, startups need to identify a market opportunity and then develop a product specific to the needs of that marketplace. One of the biggest concerns for startups when working towards a validation point is a rapidly decreasing runway.
As startup founders know there are so many moving pieces to think about while building a product; your runway is one of them. A runway is the length of time a business can survive before it runs out of cash. Paying closer attention to this is often more important than many founders may realise.
I have observed what appears to be a common approach when calculating a startup’s runway. That is, using a principle of dividing the amount of cash in the bank by the current monthly spend (burn rate). For example, if you have $80k in the bank and the current costs (team, rent, etc.) are $20k, then you have four months runway. That’s the simple, high-level view, which I consider to be a naive approach.
The first question I find myself asking founders is have you included the current liabilities? Often founders may not consider it important to look at financial reports on a regular basis. Others may lack the knowledge required to read financial reports effectively.
Predicting the financial needs for your business can be a daunting task; however, knowing your numbers is important to the survival and ultimate success of your business. Developing a habit in the early days will not only give you insight, it will build a solid foundation for the growth of your business, giving you confidence to seek funding if and when required.
Four tips to help you get to know your startup’s runway
- Create a budget. Include what you think you will spend your cash on each month. Once complete don’t edit this, lock it down so you can review it retrospectively.
- Forecast changes. Make a copy of your budget, review and amend this each month depending on the business circumstances through time.
- Review the profit/loss reports each month. Know how the numbers vary to those that you budgeted and then forecast. This will help you to better understand your business by measuring what you expected with what took effect.
- Create a cash flow. Start with the opening bank balance; add inflows/outflows from your budget to predict when the cash will run out. Remember to include unpaid liabilities such as credit cards, payroll liabilities and taxes. Reconcile this each month to the actual cash in the bank.
If numbers aren’t your strong point consider getting some help. Engaging someone with experience to take over the process or help you gain a stronger understanding may help you stay in front of the waves.
Clare Hallam is a Startup Operations Specialist.