RUNWAYS

Accelerate your business with these expert tips on "Runways" - Analyse and discover this TIP!

"Runway" is a term that is used in the business world and is used to refer to startups (+) to describe the amount of time your company has before it runs out of funds and has to close down or look for new sources of funding. The amount of time a company has to achieve its objectives and become profitable or find more investment before it runs out of money. This is the number of months they can continue to operate without another injection of funding. Normally, 12 or 18 months is the usual time frame, but in times of difficulty in closing new rounds of financing, it is preferable to go to 24 or even 36 months. For if the burn rate defines the rate at which we are spending money, the runway will show us how far we can go with what we have left in the fuel tank. That is to say, the runway measures how many days of life our company has left before we run out of cash based on our spending pace (assuming our expenses are higher than our revenues). In addition, the runway, to some extent, gives an idea of how much time the startup has for negotiate their round (+). If your runway is very tight and there is little cash left, then you have little room to negotiate and this may cause the startup to accept poor terms with investors.

TIPS ON HOW TO IMPROVE THE RUNWAY OF YOUR NEW VENTURE

1. Focus on your customer segment (+): verify that the product or service offered by the startup is sufficiently attractive to the market and meets the expectations of your customers.
2. Control costs: evaluate and control the company's costs and look for ways to reduce them without sacrificing the quality of the product or service.
3. Diversify income: explore new revenue streams and expand markets to increase growth opportunities - be careful not to lose your focus!!!
4. Develop a financial plan that anticipates your financial needs. funding: create a financial plan (+) long-term, including a realistic budget and an effective investment strategy.
5. Constantly evaluate performance: regularly review the company's financial performance and key indicators and make necessary adjustments.
6. Anticipate the search for financing, touching all sources... but, remember, the best source is always your customers - sell more!
7. Maintain a growth mindset: focus on long-term growth and success, rather than short-term gains.

Some practical examples of runway calculations:

Suppose a startup has cash on hand of $100,000 and a monthly expenditure of $20,000. In this case, the company's runway would be 5 months:

Runway = ($100,000) / ($20,000/month) = 5 months

This means that, if the company fails to generate new revenues, it would only have enough cash to sustain its operations for 5 months.

Let's imagine that a company has a cash flow of $50,000 and a monthly expenditure of $15,000. In addition, it is expected that in the first month it will generate an income of $25,000, in the second month an income of $30,000 and in the third month an income of $40,000.

Runway = ($50,000 + $25,000 + $30,000 + $40,000) / ($15,000/month) = 6.67 months

In this case, the company would have enough cash to sustain its operations for approximately 6 months and 20 days.

Suppose a startup has a cash flow of $75,000 and a monthly expenditure of $10,000. However, in the next month, the company expects to receive an investment of $250,000.

Runway = ($75,000 + $250,000) / ($10,000/month) = 32.5 months

In this case, the company would have enough cash to sustain its operations for approximately 32.5 months, although the calculation assumes that there would be no new unexpected or one-time expenses.

Case study of runaway calculation for an entrepreneur

Clara is an entrepreneur who is launching a startup to provide digital marketing consulting services to small businesses. To launch her business, Clara has saved $50,000 from her personal savings and has secured an investment of $100,000 from an angel investor. Clara plans to use these funds to cover her operating expenses, such as office rent, team salaries, digital platform development, advertising and other necessary expenses.

To calculate your company's Runway, Clara first you need to calculate your Cash Burn Rate (CBR), qwhich is the amount of money your company is spending each month. Clara estimates her CBR to be $15,000 per month, which includes her and her team's salaries, office rent, advertising costs, digital platform development and other expenses.

With this information, Clara can calculate her Runway using the following formula:

Runway = Box / CBR

Where "Cash" is the total balance of your bank account, and "CBR" is the monthly Cash Burn Rate.

Assuming that Clara has $150,000 in her bank account at the time she launches her business, we can calculate her Runway:

Runway = $150,000 / $15,000 = 10 months

This means that Clara has 10 months before she runs out of cash, assuming her monthly expenses remain constant. With this knowledge, Clara can plan her business strategy and take steps to ensure that her business generates enough revenue before she runs out of cash. She can also adjust her strategy to reduce costs and increase her runway if necessary.

What is the difference between RUNWAYS and Time-to-Tomb (TTT)?

The main difference between Runway and Time-to-Tomb (TTT) is that Runway focuses on how long a startup can run on cash on hand before running out of funds, while TTT focuses on how long a startup can run before closing due to lack of liquidity. In other words, Runway focuses on the startup's uptime in the short term. (depending on the money currently available in cash), whereas TTT focuses on the long-term viability of the startup. (based on expected expenditure and income). Both metrics are important for entrepreneurs to make informed decisions and plan the financial strategy of their startup based on its economic and financial viability.