Two measurements of cash burn
There are two main metrics to understand and calculate your cash runway confidently:
Gross burn rate: The total amount your company spends each month, regardless of incoming revenue.
Net burn rate: The amount of cash lost each month, once you factor in revenue.
As we’ll see, knowing net burn rate is critical to actually calculating your runway. Gross burn rate is also interesting for business owners as a pure marker of how much you spend today.
Particularly for those companies making little or no revenue (like early-stage startups), there will be little difference between the two. And at this stage, you won’t have many options available to reduce the latter other than simply spending less money overall.
Cash runway formula
The cash runway calculation is relatively straightforward, providing you have a clear understanding of your net burn rate. From there, you simply need to
Total amount of cash÷ monthly net burn rate. In this case, the “cash in” includes both your saved funds and what comes in each month (factored into net burn).
Since we use monthly burn, the result is also expressed in a number of months. So a company with £10 million in savings and a monthly burn rate of £1 million has a runway of 10 months. If that burn rate is reduced to £500,000, the runway doubles to 20 months.
This is based entirely on the current situation, using actual figures. You may also choose to build your cash runway calculation on forecasts. This makes sense if you expect the burn rate and cash reserves to change significantly.
Total predicted cash ÷ predicted monthly net burn rate. The calculation itself is the same, but allows you to work with forecasts.
You mostly likely will work with both sets of figures. The first is the situation today - your current cash runway - and the second is the runway you expect to have.
The ideal cash runway
There are many ways to run and grow a business. So the “ideal” runway depends on any number of factors, especially your business model and investor or shareholder expectations.
But for tech startups, there are widely acknowledged benchmarks to determine whether you’re overspending or will need additional capital sooner than hoped.
Most startup founders and investors want 18 months’ runway. Since a standard fundraising round can take around six months - and you don’t want to rush it - this gives you roughly one year to focus on business performance before hitting the road again.
The ideal burn rate and runway also changes depending on the market. Until mid-2022, startups commonly prioritized growth over pure efficiency. The net burn rate was less important than building your revenue base and outpacing the competition.
In an economic downturn, two things tend to happen:
Incoming revenue decreases, because customers are less willing to buy your goods or services. This increases net burn and therefore shortens the runway.
VCs are less willing to invest, which makes having enough cash (and a long runway) even more important.
When the market is flush with cash, you can afford to spend faster and get to your next venture capital funding round more quickly. But when interest rates are high and equity is harder to come by, you need to know that your company’s cash will last as long as possible.
In a boom: 18 months is a very healthy runway
In a downturn: You’d love to have 24-36 months up your sleeve
How to extend your cash runway
Broadly put, you have four main ways to extend the cash runway:
Reduce burn, also known as cutting costs and minimizing outflows
Increase revenue, which in turn reduces your net burn rate
Raise new funds, usually in the form of dilutive equity
Increase debt though government or bank loans
These are four valid options, and the best CFOs know when to press each button to keep the company’s cash flow position strong.
For example, if revenue is strong and you just need a quick cash injection, a loan may be the best option. It’s non-dilutive, and provided the interest is low (and so is the risk of default), it’s a price work paying.
Naturally all businesses would choose to increase revenue first if possible. And some are able to identify a handful of key initiatives to bring in receivables faster or in greater numbers. Efficiency processes can certainly make a big difference.
But most likely you’re reading this because you’re concerned with the first point above. Here are a few principles to reduce expenditures and move towards profitability.
Create a clear expense policy
Great businesses operate on a high level of trust and freedom for team members. And often for young and growing businesses, there’s very little in the way of “policies” at all.
But if you’re serious about the runway and want to keep the cash balance under control, you need to keep spending under control. And the best way to do this is with a clear, enforceable expense policy.
This doesn’t have to be draconian. In reality, the best expense policy examples are short, clear, and empower employees to make the right decisions. It’s not an exhaustive list of rules, but rather an actionable set of best principles.
Here’s a great guide to creating your company expense policy.
Track spending in real time
Another major change you can make is to monitor costs as they happen, instead of at the end of the month or quarter. Too often, companies don’t know what’s spent until it’s too late. They wait until expense accounts are balanced, at which point there’s not enough money left to keep the budget as forecast for the new quarter.
You need a good spend management system that tracks costs in real time and gives your finance team a clear overview of all spending. This lets you make more informed decisions as you go and react quickly when spending gets out of hand.
Reduce marketing spend
Optimizing a marketing budget is always a tricky balance. Cut too much and you inhibit growth. You need to spend money to make money, after all. But spend inefficiently, and you’re basically throwing money away.
The potential downside is you’ll never know how much business you could have generated with more investment. But you should expect lower revenues as a result, which can be a bitter pill to swallow.
The good thing about reducing top-line marketing spend on things like social media advertising and out of home campaigns is that it’s largely temporary. If the economy changes or you want to reprioritize growth, you can always put more money in.
We’ve seen waves of layoffs in tech and other high-profile industries as executives try to pull their companies towards positive cash flow. While nobody wants to take this step unless absolutely necessary, in some cases you simply have no choice.
Take control over spending for a healthier runway
To get to a lower gross burn rate and a healthy runway overall, you need full control over company spending. Without knowing where payments go and why, you have to rely on constant common sense and the restraint of your teams.
Proper spend management provides one source of truth and control over company credit cards, invoice payments, employee expenses, and all other operational spending. You get smarter processes, easy automation, and a much faster monthly close.
Most importantly, you keep spending in check so you can focus on growing revenue. Get started here.