Startup finance basics - cash metrics

Cash is king

Like any other company, a startup must be able to meet its financial obligations on a daily basis - e.g. payment of vendor invoices, salaries and wages, lease, etc. To ensure that your startup does not run out of money, you must know at least two cash metrics that you also must be able to quantify:

cash burn & runway

To determine your cash burn, you need to have two pieces of information:

1. cash incoming (for example, sales revenues) and
2. cash outgoing (e.g. costs).

Your cash burn can then be calculated quickly and easy:

• cash incoming (10,000) - cash outgoing (30,000) = cash burn (-20,000)

You should calculate and watch your cash burn weekly. You should also know your average monthly cash burn. For example, you can calculate a monthly average of your cash burn for the last three months. You can use the average monthly cash burn to calculate your runway in the next step.

Runway

The runway is probably one of the most important cash metrics for a startup. It is supposed to tell you for how long your money will last. To determine your runway you only need two pieces of information:

1. bank account balance and
2. cash burn (monthly average).

Your runway can then be calculated quickly and easy:

• bank balance (200,000) / cash burn (20,000) = runway (10 months)

The runway moves in the tension between the investments that have to be made to build the business and the simultaneous need to keep the runway as long as possible. The goal is to bring this tension into a healthy balance. One indicator of a healthy balance is that your runway should be 18 months, not just 12 month after you received money from investors. After all, you want to focus on developing and selling your innovative product. You don't want to be in fundraising mode permanently.

Costs

In order to achieve a healthy balance between necessary investments and runway, you need to know your costs exactly. And of course you should not forget any significant costs. This can easily happen with personnel costs - for example, if you forget to add other costs such as employer's contributions to social security and for equipment, office equipment etc. to the actual salary. You also need to understand how the costs of your startup company change as it grows. In addition, you should consider every expense for your startup as an investment. Every expenditure must help to advance the startup and make it more valuable - Return on Investment (RoI) is the keyword here.

And don't forget: The best startups do more with less.

Conclusion

As a Founder it is always your responsibility to know the cash burn and the runway of your startup. Even if you have hired a CFO. You need to control your costs and make wise investment decisions so that your startup will achieve set milestones and in order to make sure the money will last for 18 months as planned. Your mindset should always be to manage your money under the assumption that you won't be collecting any additional money from investors.