In the era of startups, cash flow is the oxygen that keeps your business alive – fueling growth and promoting marketing and product development. But amid the chaos of building something new, many entrepreneurs overlook one critical reality: their startup runway.

Have you ever thought how many months your business could survive before it runs out of cash?

If you are unsure, you are not alone. Many startups fail to calculate it properly, leading to serious consequences.

Keep reading this blog to get a detailed understanding of startup runway and how a CPA or a tax advisor help them manage their runway effectively.

About Startup Runway

Startup runway refers to the number of months a company can operate a business before it’s out of money. It measures your financial strength and determines how long you have to hit key milestones like launching a product, acquiring users, or raising your next funding round.

How to Calculate Runway

The runway is a crucial tool for budgeting, strategizing, forecasting, and fundraising across the company’s lifecycle. You can calculate this simply with a formula –

Startup runway = current cash balance ÷ burn rate

1. Check out your cash balance at the initial stage.

2. Find the cash balance at the end of the period you are measuring.

3. Calculate your net burn rate, i.e. the money you lose every month. You can easily calculate this by a formula = (starting cash balance – ending cash balance) ÷ number of months.

4. Determine the startup runway.

Why Your Runway May Be Shorter Than You Think

Many startup founders calculate runway using the simple formula mentioned above. They assume it’s a clear picture. But in reality, the actual runway is often shorter than the basic estimate. Here’s why:

• The burn rate often fluctuates. As the company grows, it has to spend on new hires, new product launches, office space, and marketing needs. This increases the burn rate over time, making it difficult to calculate the runway estimate.
• Expectations do not always meet the reality. Assuming that every potential customer will convert soon can give you a false sense of financial security. This can certainly affect the runway.
• Every startup has to deal with legal fees, compliance costs, software upgrades, or tax payments. This can lead to unexpected expenses, thereby stimulating the cash flow.
• It’s not that every investor will pay you on time. Many founders have to wait for too long to raise their funds. Especially, if market conditions are tough, fundraising can even take 3-6 months. In such situations, planning to raise capital when you only have a few months of runway left is risky.

Strategies to Extend Runway

Are you concerned about losing the runway? Check out the proven ways that help extend your startup’s survival period.

1. Maximize sales: The best way to extend the lifespan is by driving more sales without raising any significant costs. Look for strategies that help maximize your business ROI. For example, you can upsell and cross-sell to current customers, add charges for new features, etc.

2. Cut unwanted expenses: In the early stage of a startup, every dollar counts, and trimming costs can buy you crucial extra months of operation. Eliminate unnecessary expenses and control the burn rate.

3. Use corporate credit cards and other non-equity financing methods: Another way to avoid compromising your ownership is by leveraging non-equity financing options. These can be corporate credit cards, lines of credit, revenue-based financing, or grants. You can use corporate credit cards to manage short-term expenses and choose non-dilutive funding such as loans, grants, crowdfunding, etc., to access capital without giving up equity.

Find a CPA or Tax Advisor to Help You with Startup Runway

While you focus on growth and product development, a certified public accountant can help with the startup runway. By managing the cash flow, tracking expenses, and forecasting financial models, they ensure financial health stays in check. This clarifies that the cash burn is under control and that the runway will last longer. In short, teaming up with a CPA or tax advisor is a smart investment for your startup’s protected future.

So, what are you waiting for? Give us a call and our team of CPAs in California to plan your next raise.