A startup runway is a time a company can keep operating before the finances run dry. Smart management of business resources will extend the startup runway and lead your company to success.
It is possible to run out of funds, especially in the early stages of your startup, which is most common when you depend on a secondary source of funds to pay for your business expenses and not profit earned through sales.
Most of the time, it is the mismanagement of business resources or external factors such as market changes and unforeseen developments, that may lead to things not working out the way you wanted to. Other times, it could be mistakes that lead your business in the wrong direction, resulting in the loss of sales and customers. Either way, the risk of losing your funds is very real.
Losing financing or a severe decrease in funds will have a serious impact on your business, possibly meaning bankruptcy and discontinuation of business. Hence, managing and expanding your startup runway should be a priority, especially if you have a leadership role to play.
Before we discuss how best to turn this situation around, we suggest that you take a quick look at how to determine the remaining uninterrupted months of operations in a startup, known as the runway. You must understand how much time your company has left in the event of a financial loss or a major setback.
To manage your startup runway, you have to start by calculating it.
It’s quite simple; all you have to do is divide the initial cash balance or the capital you started with by your monthly net burn rate. The monthly net burn rate is the difference between cash in and cash out. In other words, it is the rate at which you are losing money. Having a yearly negative net burn rate shows that your company is profitable, as it proves that more cash is coming in than it is being spent.
This gives you the number of months before your money or runway ends. Being aware of this number is a way of forecasting future earnings and expenses, and enabling yourself to plan, invest and budget wisely.
The ideal startup runway timeframe is eighteen months. It would be best to prepare while keeping this number in mind. This way, you can spend the bulk of your efforts and time to meet goals and raise funds. Having this timeline in mind keeps you vigilant of how quickly you need to hit your business milestones and if not met, how you can cut down on costs and where.
There is also a chance that your startup runaway is shorter than you would want it to be, calling for immediate action, which requires cutting down on unnecessary expenses. You can start by downsizing on your office and operational expenses – adjusting payroll, automating processes, and in dire cases, even downsizing. You can survive through the worst by also making an effort to raise your capital instead of solely focusing on keeping your head above the water.
On a positive note, your startup runway calculations may make you realize that you have more than enough runway for a great start. This means that you can make the best of this period and the financial resources you have on hand, to ensure business survival and sustainability.
Some actions, if taken on time, can further improve the financial state of your runway. Investing in marketing, sales, growth strategies, operations, and talent acquisition are some areas to focus on in a balanced way. Doing so will help you see an extended startup runway and take your plan forward towards a healthy and prosperous business.
Financial crises are one of the most common reasons for startups to fail. A few simple tips can help increase your cash flows, reduce unnecessary expenditure, and stretch that runway.
You do not always have to raise costs to drive more sales. This can be done through careful planning and strategy. Upselling and cross-selling to current customers, trying new approaches to pricing, targeting an adjacent market, or charging separately for newly added features in your products and services are all great ways to bring in more sales without breaking the bank.
Review the effect of your spending before making any major investments and rethink the purchase of large assets in terms of how much revenue they will help you make. If the risk is low, you can go ahead with it. However, if the purchase makes a large dent in your budget, delaying it would be best since you cannot make that money back as quickly. It would be ideal if you could survive without making major acquisitions in the early stages of your startup because it will help with your budget and your company’s future welfare.
Minimize nonessential expenses and incur only the necessary operating costs. Rent and payroll are two of the biggest startup costs and can be controlled with a co-working space and halting any further hiring. A corporate card policy is helpful for employees when they spend on the company’s behalf. Besides this, you can use software to track expenses in real-time and one for accounting which keeps a check on daily expenditures.
Keep a check on your cash flows by planning for the present as well as the future. Create predictive models and a separate expense account for business overhead expenses.
You only require a spreadsheet to create an effective budget. Create a tab for expenses and another for income. For every expense, you record, think about how it helps your business. If you cannot find a good reason, consider canceling the fee, mark it on the fee schedule, and move on to the next item.
After formulating this macro-budget, you can formulate a micro-budget for each department in your company, which is very useful for growth planning. Marketing and revenue should be your main concern since they drive up sales. Finally, create the best and worst quotes to cover all your foundations. You want to be prepared for all possibilities, and the worst possible budget scenario is like a safety net.
Implement these plans and budgets when your business is still performing well, and you will have an easier time as your business is expected to grow further. To stay on track, there are many software applications and services available to help control your expenditures and budgetary considerations. Google Sheets is a great alternative to Excel because your numbers are automatically backed up to the Cloud and can be easily shared with other team members.
The most significant challenges that startups face today are not related to a lack of ideas or talent, but the loss of time, resources, and finances are the major causes of business failure. One of the main culprits is time and effort wasted on fundraising. As important as it is to raise funds, there are other priorities like customer and product development that need your attention early on in the beginning. Focusing on the most pressing matters is crucial when you are just starting in business.
Making your startup runway last for a long time is possible when you apply logical decisions on what areas to spend on and when to abstain from spending altogether. Careful planning, budgeting, analyzing, and weighing the present with the future expenditures will not only make your company survive longer in the market but also create a startup with better growth and expansion prospects.
A healthy startup runway you can aim for is at least eighteen to twenty-one months in length, but the total cash amount can still vary. The type of industry, fundraising opportunities, and economic conditions – all play a part in determining the amount of funding needed for the startup runway. Applying the given strategies can give you enough runway leverage and a clear understanding of how to develop a sustainable roadmap for your company.
Being vigilant about your startup runway should be the first and foremost priority whether you are in your struggling stage of building a startup or have started growing already. At Monily, we offer a resource bank of blogs, eBooks, tutorials, webinars, and case studies to help startups with managing and extending their runways. Log on to Monily.com for more information.