Now that you know what is your cash burn rate, you may understand this post’s question.
Your Cash Runway is the amount of time your startup has before its cash balance turns into negative.
For example, if your startup’s cash balance is being reduced by $5,000 per month, and you have $20,000 as available cash, in 4 months your startup will be out of money.
WHY IS IT A FUNDAMENTAL QUESTION?
It should be obvious by now that without cash any startup dies.
Therefore, to avoid that to happen to your startup, you need to manage carefully your cash reserves.
Of course, there are some things you may do in that sense as:
- Generating more revenue
- Reducing your costs
- Raising debt
- Raise funds from investors
- and so on…
However, to understand how much and when it’s time to take one or more of these measures, you need to know your cash runway.
For instance, a cash runway of 6 months, means you still have 6 months before you money ends.
FINDING THE ANSWER…
To find your cash runway, you need to know:
- Your available cash: it means how much money do you have available to spend. Cash on-hand, banks, credit lines, etc.
- Your cash burn rate: I explained this one in the previous post. To find your cash runway, you should consider your net burn rate (cash available net reduction). However, I recommend you also simulate your cash runway with your gross burn rate, in order to consider any difficulties you might have in generating revenue or higher expenses than expected.
The calculation is pretty straightforward:
Available Cash / Cash Burn Rate = Cash Burn Rate
Okay, let’s consider a practical example:
- Available cash = $50,000
- Net Burn Rate = $10,000/month
- Cash Runway = 5 months
If you have $50,000 in your bank account and you spend $10,000 per month, your startup’s cash will last only 5 months. Then, if you want to make it survive, you’ll need to put more money in your account and/or spend less cash per month.
Alright, now, you have the basis to answer our next question…