person holding a clock and a pile of cash in various denominations

Let’s take a deep dive into why runway is important, and how to make sure you have enough of it.

For aircraft to take off or land, they need runways. Likewise, the quality of the take-off and landing of aircraft depends largely on the runway quality. It has to be made of suitable material and appropriate measurements. The same applies to startups. Startups need the necessary resources to have a great runway.

So how much runway does your business need? This is one of the things this blog post will address. It will also explore why runway is important, how to calculate runway, and how to make your runway last longer. 

What is Runway?

Runway is the duration your startup has until it runs out of cash. In other words, runway is the number of months your company has to maintain long-term expenditure and continue running without raising additional funds. 

It dictates how much your startup can remain solvent. It doesn’t matter if you have lots of cash stacked somewhere. On the other hand, if you have an outrageous burn rate, it will only take time before your startup folds up. 

In finance, runway and burn rate are conjoint. Burn rate can help you determine how much longer your startup can stay before it runs out of capital.  

Why is Runway Important?

As a startup, your runway shows whether you’re spending too low or within your spending limit. It also shows if you have exceeded your budget. It indicates whether your startup will have enough money to spend on its different projects, programs, and plans within a given time. Runway helps you to analyze and rethink your expenses.

In addition, runway shows profitability. It indicates whether your company has made enough profit when compared to its expenditure. This insight then spurs you to decide whether to cut down your expenses or maintain the exact budget you have. 

Moreover, runway is an excellent tool for forecasting. Knowing your runway helps you determine how much longer your business can continue operation if it sticks to the same budget and spending habits. It will then help you decide if you have to raise more funds to sustain the business.

Calculating your runway also helps you decide if you need to increase your revenue or not (at a particular time). Runway is also essential as it allows investors to track your startup’s profit margin and growth rate. This metric will help them decide if they can invest in your startup.

How to Calculate Runway

If you do not calculate the runway for your startup, it would be impossible to enjoy the insights it gives. To calculate your runway, you must take note of your cash balance and burn rate. This proves our point earlier that runway and burn rate go hand-in-hand.

Here’s how to calculate runway; divide your cash balance by your burn rate.

Runway = Cash balance ÷ burn rate

Let’s say your startup has a $100,000 cash balance and a $12,500 monthly burn rate. Here’s the runway;

Runway = $100,000 ÷ 12,500

Runway = 8 months

With this cash balance and burn rate, your startup will run for eight months before it needs more funds. 

Again, let’s say you improve your burn rate to $10,000 per month; your runway will change.

Runway = $100,000 ÷ $10,000

Runway = 10 months

The implication of this is that your startup will run for ten months. 

How Much Runway Does a Startup Need?

Some startups might make their runway super long, up to 12 months, while others might not. Forbes, however, recommends a six-month runway for startups. So, get enough cash to run your business for six months. 

To build your runway without running out of cash, you should think about all you need for the six months. In addition, do not stop communicating with your team members about the startup’s needs and how to meet them. As you liaise with your team or sponsors, refrain from asking for too little than your startup needs. For example, if $80,000 will sustain your business monthly, do not ask your sponsors for anything lesser. 

Doing so would mean trying to run your startup on an unrealistic budget and expecting an incredible runway. Also, you have to ensure setting short-term runways. A six-month runway is okay, but a 3-year runway would be unfeasible as a lot could have changed. For instance, your budget for a particular year might not work with another due to the increased cost of goods, etc. Hence, a different burn rate and a runway.

How Much Runway Do You Need for Your Business?

As a business that has been operating for a while, having a 12-month – 18-month runway would not be a bad idea. It helps you prepare for a whole fiscal year. You can get a hold of your budgets, expenses, and income for an entire year and use the insights obtained to improve your plan for the following year.

It also helps you or your sponsors focus on other aspects of your business without worrying about where money will come in to run the business. So, a year or a year and a half is enough time to take your mind off thinking about the capital to run your business.

However, note that your business does not need all the money in the bank to have a significant runway. It only needs to identify its needs and be strategic with its expenses. Your business must maintain discipline while spending. 

How to Make Your Runway Last Longer

To extend your financial runway, you need to find a way to increase income and cut expenses. For example, find a way to sell more products or services to your target customers. Likewise, you can make more sales by employing different pricing strategies.

Endeavor to cut unnecessary costs that increase your burn rate. For instance, you could move to a smaller office space if you have a small team. You might even ask your team to work remotely if it fits your company setup. Instead of spending on contractors, consultants, or freelancers to achieve a task, get your expert team member to handle such a job instead. This will reduce how much you have to spend. Another way to extend your runway is to set monthly spending limits for team members who have to purchase a tool, subscribe to a plan, etc.

To conclude, a runway shows how long your startup can remain before it runs out of cash. Your startup might extend its runway if it cuts down its expenditure and focuses on generating more revenue. While building your runway, ensure the steps you take are commensurate with the runway you expect. It will be unrealistic to set a small budget for a long runway. 

If you have trouble setting or extending your runway, we can offer you the assistance you need at Intrepid Finance. We can closely examine your revenue and help you acquire growth capital to suit your startup runway needs. Reach out to us, and let’s get started! 

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