Managing Burn Rate and Cash Runway

Of all the metrics that your startup should be familiar with, two of the most important are burn rate and cash runway. Burn rate is the rate at which your startup spends money before it’s able to earn a profit, and cash runway is the amount of time your startup has before its cash is fully depleted. Both of these metrics are important for planning fundraising rounds and setting a strategy for your startup’s long-term viability. What’s more, every decision that your startup makes can have an impact on its burn and cash runway, underscoring the importance of understanding these two metrics and practicing effective cash management. Read on to learn more about the importance of burn rate and cash runway or tune into this webinar from Graphite Financial and Brex for further information.

Burn Rate 101: Why it’s More Than a Monthly Number

Burn rate is more than just an expense figure — it’s a look into the financial status of your startup to help you determine how much revenue it needs to continue operating sustainably. A high burn rate means that you’re spending cash at a fast rate, while a low burn rate indicates you’re moving through cash more slowly.

Every decision that your startup makes has an impact on its burn rate. It’s influenced by more than just your startup’s operational costs but by the strategic decisions you make, your hiring strategy, contract terms, payment cycles and more. Even the seemingly smallest operational decision can impact your burn rate and shift your cash runway.

Failure to properly monitor your burn rate and your startup may hit a “lights out” date, or a day when your startup runs out of money. It’s a big part of the reason why being proactive and properly managing your burn rate is so important. When the burn rate is properly managed, it helps ensure that there are enough funds for your startup to reach its next milestones.

Defining Burn Rate and Cash Runway

Burn rate and cash runway help startup leaders measure and communicate their financial positions. You’ll want to be sure you know the difference between your startup’s gross burn and its net burn and how cash runway impacts investor confidence.

You can calculate cash runway by dividing your startup’s total cash balance (i.e., cash, bank balances, liquid assets, cash reserves, etc.) by the cash burn rate. The number you end up with will help inform your startup how much longer it can get by before it is either profitable or has to raise more funds.

Gross vs. Net Burn Rate

Gross burn rate is the total amount of money your startup is spending each month, while your net burn is the amount that it’s losing each month after calculating its revenue. Gross burn excludes revenue, while net burn paints a more accurate picture of your startup’s cash flow by including it.

Your startup needs to track both. Gross burn can help inform how much money your startup needs to break even, while net burn helps indicate more of your startup’s overall financial health. A negative net burn means that your startup is turning a profit — and vice versa.

Pinpointing the “Lights-Out” Date

Your startup’s “lights-out” date is the day when your cash runs completely dry. Monthly and/or quarterly forecasting can help your startup anticipate when this day could come and plan for additional capital or fundraising rounds. Another strategy to help pinpoint this day is to model various scenarios (i.e., hiring delays, contract changes, etc.) to see how your decisions could impact cash flow. From there, you can adjust these assumptions in real time and make more informed decisions to optimize the cash runway.

Factors Influencing Burn Rate

Every decision your startup makes impacts its burn rate. Some of the core drivers include:

• Payroll
• Vendor contracts
• Customer billing cycles
• Overhead expenses

Even the seemingly smallest decisions, like whether to pay vendors on a monthly or annual basis, can impact your burn rate. It underscores the importance of not overlooking any cost, even the ones that seem the most minuscule.

Hiring and Payroll

Every decision your startup makes can impact its burn rate — and hiring and payroll are certainly important to manage. For example, early-stage startups should be cautious with their hiring practices, as any added salary and benefits can all lead to more cash outflow and give your startup a longer runway to profitability. Keep in mind that hiring also involves various indirect costs, like onboarding, training and equipment purchases.

So how should you hire if your startup is still in the early stages? Hire wisely — be sure to only hire out of necessity and for the most crucial positions.

Contract and Payment Terms

Vendor and customer contracts have a significant role in cash outflow and inflow.

Starting with vendors, startups should be sure to negotiate favorable terms to optimize short-term cash usage. Aim for “Net 60” vendor terms, which means your startup will have 60 days to pay an invoice and offer more payment flexibility. Try to avoid “Net 30” terms, which means you’ll only have 30 days to pay an invoice.

How your customers are paying you also significantly impacts the burn rate. If you can, try to incentivize annual billing or upfront payments. Doing so significantly improves your startup’s positive cash flow, which can help with its financial stability and planning. It can also help with customer retention.

Using Financial Models to Forecast Scenarios

Startups should consider using financial modeling to their advantage to better dictate how their decisions impact the burn rate and cash runway. Analyzing various “what if” scenarios can help guide strategic decision-making and extend the cash runway.

Choosing the Right Tools

While early-stage startups may start with a more basic way of forecasting scenarios, advanced tools like Runway or Mosaic can better streamline financial modeling. Consider also integrating banking and credit card data into your forecast with tools like Brex.

Strategies to Optimize Burn and Extend Runway

Looking to optimize burn and extend your cash runway? Some tips for doing so include:

• Negotiate annual billing
• Manage your headcount carefully and be weary of when you hire new employees
• Prioritize expenses that help with ROI
• Make adjustments based on your data

Short-Term vs. Long-Term Measures

Burn rate can be managed over the short- and long-term.

For instance, one of the best ways to address a poor burn rate in the short term is to implement a spending freeze while you assess a path forward.

More longer-term strategies for managing burn rate include emphasizing budgeting and incentivizing your customers to buy into annual contracts rather than monthly ones.

Guiding the Ship Safely

Tracking your startup’s burn rate and cash runway is important for ensuring long-term viability. Be sure to act responsibly and be flexible when adjusting any plans to account for these metrics. The more disciplined you are with your burn rate and cash runway, the more viable your startup is likely to be — both in the short and long term.

Take Control of Your Cash

For more information on how to manage burn rate and cash runway and to seek professional help with both, contact Graphite. We’ll be happy to perform a burn rate assessment of your startup. We can also discuss how our fractional CFO services may be able to help. Contact us today for more information and to schedule an assessment.

FAQs

What’s the simplest way to calculate my startup’s monthly burn rate?

The easiest way to calculate cash burn rate is to subtract your total monthly revenue from your total monthly expenses. This will tell you how much cash your startup is going through every month.

How often should I revise my runway projections?

Consider calculating your cash runway and reviewing your projections on at least a monthly basis and revising them if necessary.

Which key metrics are most useful for deciding if my burn is too high?

Everything your startup does has an impact on your burn rate. If your burn rate is too high, consider making efforts to reduce unnecessary expenses. This might include personnel costs, office space, marketing spend, inventory management, vendor contracts, utility bills and more.

When is it time to hire external help, like a fractional CFO, to manage burn?

Consider hiring a fractional CFO if your startup is growing rapidly and your finances are becoming more complicated or if you need financial assistance and can’t justify hiring a full-time, in-house professional.

How do annual vs. monthly customer billing terms affect my runway?

Incentivizing annual billing or upfront payments can help significantly reduce your startup’s negative cash flow and help with increasing financial stability and planning.

What tools can integrate bank and credit card data for real-time burn tracking?

Advanced tools like Runway or Mosaic can better streamline financial modeling. A tool like Brex can also help integrate banking and credit card data into your forecast.