Discover practical steps to extend the runway of your business, how to calculate burn rate, and reduce burn rate.
Every business desires to stay in operation for as long as it can. Nobody plans to get into the business space and fold up. However, financial crises often challenge the desire to remain in business. When this crisis hits, it can badly affect a business’ runway. To avoid this issue, we shall discuss how you can extend your runway, how to calculate your burn rate, and the mistakes to avoid as you work on your runway and seek capital.
How Much Runway Should You Have?
The runway length your company needs depends on whether it is a startup or a small business. Whether you follow experts’ recommendations on an ideal runway length or not, it is sure that you want to keep operating for a while before you begin to raise more capital. So, think about how much capital you have to finance your company. How long will the capital you have sustain your company?
When it’s time to determine how much runway you should have, it would be great to follow experts’ advice. If you own a startup, experts recommend a six-month runway. Likewise, if you run a small business, you should prepare for a 12 or 18 or 24-month runway. Whether a startup or a small business, your runway helps you reach set milestones and complete crucial projects.
Setting your runway for 6, 12, or 18 months does not automatically guarantee success. Instead of sitting back and expecting things to succeed by chance, map out plans to reach set goals within the stipulated runway. Also, allocate funds and time to set goals and essential projects. Finally, remember to communicate with your team or financiers about any issues you face on your journey to accomplish goals within the set runway.
How to calculate burn rate
Burn rate is the rate at which a company spends its capital before generating income. Monitoring startup cash is crucial as it is an effective tool for measuring a company’s runway. This comes in two types – gross burn rate and net burn rate.
Gross burn is a company’s monthly expenses. It is the sum spent on utilities, rent, office equipment, etc., per month. To calculate the gross burn rate, sum up your monthly expenses – supplies, electricity, delivery, salaries, etc. For example, let’s say you’ve spent $10,000 on supplies, $15,000 on electricity, $20,000 on delivery, and $100,000 on salaries.
Gross burn rate = Sum of Monthly expenses
Gross burn rate = $10,000 + $15,000 + $20,000 + $100,000
Gross burn rate = $145,000
This calculation shows that your company burns $145,000 monthly.
The net burn rate is the monthly amount your company loses monthly against the cash at hand. Mind you, if the net burn rate is more than how much you generate that is not good for your business. To calculate this, subtract your expenses from your revenue. For example, let’s say your monthly income is $50,000, and your costs make $20,000.
Net burn rate = Monthly income – Expenses
Net burn rate = $50,000 – $20,000
Net burn rate = $30,000
The math shows that your startup burn rate is $30,000 monthly.
To reduce your burn rate, you can start by reviewing recurring costs. You can also increase ways to generate income. If you create more revenue and maintain your present burn rate, your business will still be healthy.
Ways to Extend your Startup Runway
- Lower Costs
Cost is an unavoidable part of running a business. People raise capital to spend on their company’s goals, human and material resources, etc. So you only have to be strategic with spending – no spending on irrelevant stuff or overspending.
If you want to extend your runway, lower costs. For instance, there is no point in buying tea on a just-in-case basis if your employees only love coffee. It would be a waste of money. Also, choose alternatives of current services with lower costs. Why lease expensive cars for your employees if it will affect your finances badly? Instead, you could pay for their bus rides if you find it cheaper and healthier for your finances.
- Increase Capital
Extend the startup runway by reaching out to your contacts to support you financially. Similarly, look for a partner or an angel investor who will financially invest in your business.
- High-Quality Revenue
Focus intensely on sources that currently bring you revenue. For instance, if your existing customers play a huge role in making a profit through sales, you could give discount codes or have product sales to encourage them to buy more.
- Increase Debt
‘Increase debt’ could sound like a problematic step, but it is not. Debt is not a completely bad thing for business. It is even more beneficial at times when compared to equity financing. Debt financing requires you to borrow some money and pay it back at a stipulated time. It doesn’t require you to sign over a part of your business & it is tax deductible. With the accrued debt, you can invest in reaching new customers or create products /services buyers crave.
Mistakes to avoid
While you run your business, don’t rush things. Take your time to search for partners or investors that share the same vision, mission, values, and goals of your business. Monitor your costs closely. Do not spend a cent on unnecessary stuff. In addition, make sure to start planning for the next before your current runway ends. Avoiding these mistakes helps your startup thrive during crisis.
Key Takeaways
- Your runway should be at least six months. It could also be up to 12, 18, or 24 months.
- A burn rate shows the rate at which you spend your capital before generating income. You should pay attention to the two types of burn rate: gross burn rate and net burn rate.
- To lower startup cash burn, generate more income, and reduce recurring costs.
- Ways to extend your runway include lowering costs, increasing capital, raising quality revenue, and debt financing.
- When sourcing for funding, look for partners and investors who share the same vision as you.
Raising capital can be challenging. This is why Intrepid Finance exists. Intrepid can help you to access the growth capital you need to keep growing. Request capital today.
