Extending your runway involves generating enough revenue to keep you in business. Check this blog post for how to do this.
Companies often face financial challenges and business uncertainties that sometimes shake them from the peak down to their roots. These financial problems could result from inflation, recession, bad financial decisions, or even a startup burn rate. When any of these happens, it is usually challenging to have enough cash to keep running their businesses.
So, if your startup is already rolling on some runway, we will show you how to generate more funds to extend your startup runway. We’ll also discuss what cash runway is, its importance, and how to calculate it.
What is Cash Runway?
Cash runway is the amount of time your startup can keep running before it needs more cash. It determines how long or short your business will remain in operation before it burns the cash at hand and needs extra cash.
Therefore, it is important to determine your costs for up to 6-24 months to avoid running out of cash abruptly. Likewise, you must watch your startup cash burn. Doing this will help you stick to your outlined cost and not overspend.
Why is Runway Important?
The runway is like a lens through which you can clearly see the present you are operating in and your startup’s future. It helps you see how financially healthy your business is and how much longer it will remain.
Cash runway helps you ensure that your company runs smoothly. That is, you’ll be able to spend your capital on the most crucial needs of your business, thereby aiding its progress. For example, you will pay salaries, for utilities, run marketing campaigns, etc., without falling short in any of these areas.
In addition, it keeps your burn rate in check. When you measure your cash burn against your capital, you will realize if you are sticking to set costs or overspending. Suppose you have $300,000 to spend on the company’s expenses for six months. If you spend $200,000 in 3 months, that’s not okay. It shows that you would need to raise more capital.
In other words, you must strategize properly to ensure that your company’s costs are not higher than the available capital. That is, do not make limited funds available for big financial responsibilities. If $3,000 will cover monthly expenses, do not set apart $1,500, as it will not cover them. Overspending or budgeting too low can cause you to go into your savings, which is not good for your business.
Furthermore, runway helps you determine when to raise additional funds if you do not have any financial reserves. Observing your burn rate and cash will help you decide whether to set up fundraising events, get investors, use equity financing, use debt financing, etc.
How to Calculate Runway with Burn Rate
Calculating your runway and burn rate shows where your business is, financially. It will show you if you are prudent with your finances or overspending. Also, it will show you how long the capital at hand can run your business.
To calculate your runway, know your (i) cash balance and (ii) burn rate.
If your cash balance is $50,000 and your burn rate is $5,000.
So, Runway = Cash balance ÷ Burn rate
Runway = $50,000 $5,000
Runway = 10
This means that if you spend your cash balance of $50,000 at $5,000 monthly, your business will run for 10 months before running out of cash.
The burn rate shows how fast you spend your company’s capital before making a profit. To calculate this, sum up your monthly expenses. These expenses could be salaries, water bills, phone bills, office supplies, etc.
So, let’s say you spend $20,000 on salaries, $500 on water, $500 on electricity, and $1,000 on office supplies monthly.
Gross burn rate = Salaries + water + electricity + office supplies
Gross burn rate = $20,000 + $500 + $500 + $1,000
Gross burn rate = $22,000
This shows that your company burns $22,000 monthly.
Extending Your Runway
Extending your runway will give you more time to stay in business. For example, if you have set an 18-month runway, you can’t stop there. You have to extend your runway to continue its business operations. However, extending your runway has to do with generating funds. Runway extension contributes largely to business continuity. Now, we shall discuss how to generate more funds for your runway.
How to Generate More Funds for Your Runway
Your startup might not always have all the capital needed to keep it running efficiently. Therefore, you need to look out for ways to generate more funds.
- Increase Capital
Raising capital to extend your runway comes in different ways. One of the ways to do this is to get Revenue Based Financing for your business. Even though financing increases your financial expectations, the funds you access can help your business grow when it needs it most. Likewise, you can reach out to your bank to loan you some money. However, note that your bank needs a track record of business success to loan to you.
- Generate Additional Revenue
To generate additional revenue, you can expand your geographical reach. Open a new sales location in a different state or even go international. Likewise, you might ship your products or deliver your services to new areas.
You can also upsell to your customers. This technique will help you sell products or services that have higher prices. In addition, offer subscriptions. Subscriptions will help you make recurring revenue without worrying about where money will come from.
Mistakes to Avoid
As you seek to extend your runway, do not focus so much on revenue generation that you neglect other significant aspects of your business. Avoid rushing while seeking capital. Take your time to weigh every available option. The revenue generation solutions we provided are a good place to start.
- Cash runway is the amount of time your startup can keep running before it needs more cash.
- Runway is important because it helps keep your burn rate under control.
- To calculate your cash runway, divide your capital by your burn rate.
- To determine your gross burn rate, sum up your monthly expenses.
- You can generate funds to extend your runway by raising capital and making additional revenue.
- While seeking funds to extend your runway, carefully check the pros and cons of all available options before choosing.
Extending your runway will help you remain in business. However, your runway depends largely on how much capital you can raise. This business need is one of the reasons Intrepid Finance exists. As a venture capital company, we will give your company capital based on its recurring revenue. Ready to get the capital? You can request capital now!