Startup’s CPA Burn and Runway Calculation
If you’re a startup CEO, your biggest concern in the early days is undoubtedly, “How long do we have until cash runs out?”
When it comes to analytics, quality is always better than quantity. The more you can distill your business’ performance data to just a few insightful metrics, the better off you will be. This allows you to rally your team around a few ‘guiding stars’ so they can focus on working toward the same goals.
True to their name, Startup’s CPA specializes in advising startups and companies on a steep growth curve. Given their high-growth nature and aptitude for raising outside funding, startups often require keen management of cashflow.
Most startups operate at a loss for their first few years, prioritizing growth over profits. This means that monitoring expenses (burn rate) vs money in the bank is critical to their success.
The most popular question for startup CEOs is undoubtedly, “How long do we have before we run out of money?”
The best metric for answering this question is Runway: the measure of how many months a business has at their current rate of spending before there is no more money in the bank to spend.
Based on their runway, CEOs can forecast things like:
When do I need to raise money again?
How much do we need to improve our sales cycle?
Are we spending more than we need to in order to reach our goals?
Runway is calculated as: Cash in bank / monthly burn rate
Before calculating runway, we first need to calculate burn rate. There are two types of burn rate:
Gross Burn: The sum of all expenses each month. If you spend seasonally, you may want to consider summing all of your expenses for a year and divide by 12 to get an average.
Net Burn: calculated the same as gross burn, but including new cash from operations.
In most cases, using Net Burn in your Runway calculation is the best indicator of how long your company has, but in the case of startups, it’s also helpful to look at how long a company has if all operations cease for a certain time period.
Startup’s CPA built an analysis to compare runway using both gross and net burn so the CEO could understand both scenarios: What happens if we keep on moving like we are with no growth? What happens if we lose all business temporarily?
Calculating Net Burn Rate
First, Startup’s CPA used the average function to get the average total expenses from the last 12 months (Gross burn)
Then, they calculated Net Burn Rate by creating a new custom metric to add total income back into the Gross Burn
With Net Burn Rate now calculating, they simply divided cash in the bank by net burn rate to get the startup’s Runway
Displaying the findings
Keeping things simple, Startup’s CPA plotted runway using both gross burn and net burn in one section of a board. Since they’re using net burn, it’s also helpful to see how the runway has changed since last month. For this they’re leveraging a VS prior analysis to compare this period to the period before.
In the visualization above you can see that Runway using Gross Burn has gone down, which must mean that expenses grew by a good margin in that time.
But, by looking at Runway using Net Burn, we see there’s nothing to worry about. In fact, there’s plenty to celebrate. This company is now operating profitably.
A negative net burn rate means that you’re bringing in more cash than you’re spending.
By looking at the Year to Date visualization of Net Burn, you can see that this is a new phenomenon and there was a large inflow of cash from operations.
Why this is Really Good Analytics
Offering two different kinds of runway calculations allows the startup CEO to make plans for fundraising or new sales relative to their current situation.
With startups, ups and downs are very severe. It’s not impossible to land in a situation where no new money comes in for a few months, but with a recurring revenue model in place, it’s somewhat unlikely.
Using both runway calculations, this CEO will have a plan for success in the face of bad news.
What we’d like to see next
It’s obvious from looking at these blocks that runway is changing, and some months it’s a significant change. We’d like to see more information on what’s causing these fluctuations, and supporting material to help fix cashflow issues if they come up.
We’d like to see Startup’s CPA build blocks to answer questions like:
What happened last month to cause our runway to lengthen? How can we repeat that?
If our runway is short and we need more money, what metrics do we need to improve before meeting with the bank, or vc, or angel investors?
What were our specific milestones we needed to hit and how do we measure them?