If you want your startup to survive a recession
You need to understand Burn Rate and Runway:
You need to understand Burn Rate and Runway:
1/ Burn Rate
A startup’s burn rate is the amount of cash it is spending each month
Let’s look at a simple example:
A startup’s burn rate is the amount of cash it is spending each month
Let’s look at a simple example:
You’re the CEO of a start-up and you’ve raised $1 million dollars
Now that you have this money, you’re going to start spending it on growing your business
You will:
• Hire people
• Buy equipment
• Pay for subscriptions
• and the list goes on and on..
Now that you have this money, you’re going to start spending it on growing your business
You will:
• Hire people
• Buy equipment
• Pay for subscriptions
• and the list goes on and on..
If you quickly want to check what your burn rate is over a single month, you can do this:
• Take your cash balance at the end of the month
• Deduct it from your cash balance at the start of the month
→ This will give you your burn rate
• Take your cash balance at the end of the month
• Deduct it from your cash balance at the start of the month
→ This will give you your burn rate
2/ Type of Burn Rate
Sometimes the term “burn rate” can be confusing
That’s because there are two types of burn rates:
1) Net Burn Rate
2) Gross Burn Rate
Sometimes the term “burn rate” can be confusing
That’s because there are two types of burn rates:
1) Net Burn Rate
2) Gross Burn Rate
3/ Net Burn Rate
Net Burn rate takes into account two things:
(1) All of the expenses you’ve paid during the month and,
(2) All of the cash inflows that you get from your revenue
The formula we covered above, can be used to get your Net Burn rate
Net Burn rate takes into account two things:
(1) All of the expenses you’ve paid during the month and,
(2) All of the cash inflows that you get from your revenue
The formula we covered above, can be used to get your Net Burn rate
4/ Gross Burn Rate
Gross Burn rate takes into account one thing:
(1) All of the expenses you’ve paid during the month
You would adjust the formula we covered above by removing all of the cash inflows from revenue that your company earned during the month
Gross Burn rate takes into account one thing:
(1) All of the expenses you’ve paid during the month
You would adjust the formula we covered above by removing all of the cash inflows from revenue that your company earned during the month
5/ Runway
Your Runway tells you how many months your startup can survive until it runs out of money based on your burn rate
Basically, if your runway is 6 months – that means in 6 months' time, you’ll need to raise more money from investors
Your Runway tells you how many months your startup can survive until it runs out of money based on your burn rate
Basically, if your runway is 6 months – that means in 6 months' time, you’ll need to raise more money from investors
How do you calculate your runway?
You take your cash balance and divide it by your burn rate
You take your cash balance and divide it by your burn rate
Let’s look at an example,
• You raised $1 million on January 1, 2022
• Your company burned $100k of cash in January 2022
• On January 31 2022, the cash balance remaining in the bank was $900k.
What is your runway?
• You raised $1 million on January 1, 2022
• Your company burned $100k of cash in January 2022
• On January 31 2022, the cash balance remaining in the bank was $900k.
What is your runway?
You would divide $900K by $100K and this will give you the number 9
That means your runway is 9 months
That means your runway is 9 months
How can you extend your runway?
Well, the easiest way to do this would be to reduce your burn rate
And you can usually do this by doing two things:
Well, the easiest way to do this would be to reduce your burn rate
And you can usually do this by doing two things:
1. Reducing your expenses
This is why you’re seeing many companies cut the size of their workforce in 2022
2. Increase revenue
You can increase your sales and bring in more cash into the company
This is why you’re seeing many companies cut the size of their workforce in 2022
2. Increase revenue
You can increase your sales and bring in more cash into the company
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I tweet about:
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• Business Frameworks
• Personal Growth
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