How to calculate your runway

I used to think calculating runway was easy.

All I needed to know was how much cash I had in the bank and what my burn rate was.

But working for early stage startups taught me that things change fast. And that you can’t always anticipate what’s coming next.

The companies I’ve worked for had to make extreme changes just to stay afloat… like laying off employees, changing the business strategy, and aggressively slashing expenses.

Luckily we survived these changes. But it was not easy.

The lesson? It’s dangerous to only have a vague idea about your runway. Don’t make the same mistake we did. 

In today’s article, we’re gonna walk you through our framework for calculating runway, even if you don’t have any revenue yet. 


But first, what’s runway?

Runway is the amount of time a startup has before it runs out of money.

Generally calculated in terms of months, runway consists of money in the bank divided by monthly burn.

For example, if you have $100k in the bank, and your monthly expenses are $10k, you have 10 months of runway.

 

How to calculate your runway

If you’re pre-seed and not making revenue yet, it’s difficult to make projections. Even predicting the next six months is impossible.

But you can calculate a range of your best- and worst-case scenarios, and communicate those to your investors.

Let’s start by calculating your net burn.

  • Low-end: What are all your costs in a typical month? (this should include salaries, office rent, taxes, software subscriptions, and other consistent expenses)
  • High-end: What are the costs if you have the worst month possible? (include all of the above and add in variable costs like legal fees or high AWS charges)

Got your best-case and worst-case scenario for monthly burn? 

Great, now let’s calculate cash-in-hand.

  • Low-end: What is your worst-case revenue per month? If you’re early stage, this is $0.
  • High-end: What is your best case revenue per month? If you already have consistent revenue every month, you can include projected revenue in this calculation.

 

Spoiler alert

As you may have already guessed, the number one thing we recommend founders do is to keep track of their cash flow.

  • How much money is coming in (revenue)
  • How much money is coming out (expenses)

Net revenue is also important, but what investors will care most about – and what will impact your business the most – is your cash flow. 

Are you hyper aware of all the costs in your business? How many months can you survive with no revenue and high costs? Can you reliably and repeatedly bring revenue into the business?

Tip: Do your best to get paid upfront for your product or services. It’s better to have money in the bank than chase down clients when they forget to pay or their card gets declined.

 

Let’s see this in action

My colleague Kera started a (fictional) cookie subscription business called Kera’s Kookies.

  • Kera raised $100k from angel investors
  • Kera pays herself $5k/mo
  • Kera hired a lawyer for $5k/quarter and a designer for $1,500 (one-time fee)
  • Kera has 200 customers who pay $100/mo. 10% of their cards decline + retention is 80%
  • Kera spends $15 to make and deliver each order

My question to you: What’s her runway?

Let’s calculate! 

  • Low-end (costs): Paying herself. Cost of goods and delivery
  • High-end (costs): Paying lawyer, designer, herself. Cost of goods and delivery.
  • Low-end (revenue): $0
  • High-end (revenue): $20,000 in revenue + $100k in bank

The formula to calculate a (conservative) runway is

low-end revenue 

+ money in the bank 

÷ high-end costs

Since we paid for a designer at a one-time fee, we can subtract that money from what we have in the bank. 

$100,000 - $1,500 = $98,500

Since we pay the lawyer quarterly, we can divide her rate by 3 to estimate her monthly costs.

$5,000 / 3 months = $1667


Putting everything together

$0 (low-end revenue) + $98,500 (money in bank) / $1667 (lawyer) + $5,000 (Kera’s salary) + [$15 x 20] (cost of goods)

$98,500 / $6,967 = 14 months.

This isn’t perfect by any stretch. This formula is meant to give you a conservative estimate on what would happen if you made no money and continued to have high costs.

 

Communicate with your investors

When your investors ask how much runway you have left, be transparent and share a simple and conservative case.

“We have $98,500 cash on hand. Assuming zero revenue and high-end costs, we have 14 months of runway.”

If you’re pre-series A, your ranges may be too general to convey to investors. Instead, give them the worst-case scenario with an asterisk that there is no new revenue included in your calculations.

Your investors will appreciate the transparency and how much you’re aware of your worst-case scenario.

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