TIME TO TOMB (TTT)

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1. What is Time-to-Tomb (TTT)?
2. What information is needed to calculate the TTT?
3. What is the formula for calculating the TTT in disaster mode?
4. How is TTT calculated in a subscription business model?
5. What should be taken into account when calculating the TTT in a business model with variable revenues?
6. Why is it important to know the TTT in a startup?
7. What information can the TTT provide to entrepreneurs?
8. What can be done if the TTT indicates that the company has little time before running out of cash?
9. How can TTT be improved in a startup?

The Time-to-Tomb is a very important metric in the financial management of a start-up. This metric measures the time the company has until it runs out of liquidity and has to close down. It is essential because gives us an idea of how many months we have left to take action and make adjustments to the cost structure, invoicing and budget. The TTT is can be calculated in different ways, depending on whether the start-up is already invoicing or not, and whether the revenues are variable or stable. In any case, the basic formula is the same: divide the cash we currently have by the monthly expenses. If there is no income, the TTT becomes the TTT Catastrophe. Knowing the Time-to-Tomb helps us to make strategic decisions in the management of our start-up, such as knowing how many months we can afford with hardly any turnover, whether it is profitable to hire more staff or invest in marketing, or when it is time to seek external funding. It also allows us to explore new business opportunities and pivot the business model if necessary, without jeopardising the financial viability of the company. In short, it is a key metric that we should not neglect in the management of our startup.

The issue of metrics is a thorny one. We tend to look for metrics that say what we want to hear, or worse, that reflect only part of the business... which leads us to make the wrong decisions. But we also need to look at survival metrics that help us understand what *momentum' we're in... Because while it is true that we should focus all our attention on the key metrics of the startup, it is also true that we should focus on the key metrics of the startup. (which help us to model the business along with the relationship funnels), we should not neglect a very simple but informative metric that I call the Time-to-Tomb:

"Time-to-Tomb or M is a metric that indicates how many months of "life" the company has until it has to close due to lack of liquidity, or in other words, it shows the life expectancy of the company".

There are two complementary approaches, which in my opinion should be on the scorecard of any start-up: 

• TTT Catastrophe = Cash (current opening balance) / Expenditure. It serves to assess, in the event that we do not have any income, the life expectancy of the company before running out of cash, and is the most common in startups that are just starting out and are not yet generating income.

TIME TO TOMB= CASH / EXPENSES X (MONTHS)

• Projected TTT = (Cash - Income) / Expenditure. In this case we start from the idea that the company can invoice something, and the TTT becomes a moving date that tells us how long we have to live at the current rate of income, moving away if we get more income each month and improve our cash inflow, and moving towards it if income decreases.

TIME TO TOMB= CASH + INCOME / EXPENDITURE

The main components for calculating this metric are:

1. Expenses - Cash Burn Rate (CBR): The bum tate indicates how much money we "burn" per month, be it in salaries, purchases...etc. It gives an idea of the operational expenditure of the company and allows us to understand the cost of keeping it open and running.
2. Box: The most important element of any company, especially if it is a startup. As my friend Pedro Bisbal rightly says, most startups die of a heart attack... the heart being the till. Although it is all very well to have good forecasts, in order to know our horizon we must assess what we have in our pocket right now. 
3. Income/forecasts: The most complex aspect to model. It aims to take into account the probability of revenues we have in the coming months. To do this we must consider not only the committed revenue (i.e. if our business has embedded recurrence) but also the revenue we expect adjusted for probability (i.e. if we expect a revenue of €1,1200 next month with a 20% probability, we will count €200).

Practical examples of Time-to-Tomb (TTT)

Here are some practical examples of how Time-to-Tomb (TTT) could be applied in different situations:

E-commerce startup: An e-commerce company has received an investment of €200,000 and has been spending €25,000 per month on operating expenses. The startup has estimated that it will take at least 12 months to generate enough revenue to cover its expenses. In this case, the TTT would be:

TTT = € 200,000 / (€ 25,000 * 12) = 6.67 months

This means that the startup has approximately 6.5 months before it runs out of money if it does not generate additional revenue.

• Software startup: A software company has been generating revenue for several months and has accumulated €100,000 in cash. The company has been spending €20,000 per month on operating expenses and has estimated that it will take at least 6 months to generate enough revenue to cover its expenses. In this case, the TTT would be:

TTT = € 100,000 / (€ 20,000 * 6) = 0.83 months

This means that the startup only has about 3 weeks before it runs out of money if it does not generate additional revenue.

• Services startup: A service company has been generating revenue for several months and has accumulated €50,000 in cash. The company has been spending €15,000 per month on operating expenses and has estimated that it will take at least 9 months to generate enough revenue to cover its expenses. In this case, the TTT would be:

TTT = € 50,000 / (€ 15,000 * 9) = 3.70 months

This means that the startup has approximately 3.5 months before it runs out of money if it does not generate additional revenue. It is important to note that TTT is only one metric that can help a startup understand how long it can survive on its current cash. It is also important to note that TTT does not take into account possible fluctuations in revenue or unforeseen expenses that may affect a company's survival.

3 PRACTICAL EXAMPLES OF THE USE OF TTT

TIME-TO-TOMB CATASTROPHE

For example, let's say we have €20,000 in cash, and we spend €4,000 a month on team salaries, marketing and office rent. The traditional way of calculating Time-to-tomb in catastrophe mode would be:

TTT Catastrophe: 20.000€ / 4.000€ = 5 months

In other words, if we had no income, our company would last a maximum of 5 months before running out of money.

PROJECTED TIME-TO-TOMB - SUBSCRIPTION MODEL

But let's look at a more complex example: Let's imagine the previous scenario, but in this case our startup is already invoicing and has a subscription business model. If each customer earns us €15 per month and we expect to have 120 subscribers, we could conclude that we can expect to earn approximately €1,800 per month (120 subscribers x €15 per month).

TTT Catastrophe: 20.000€ / (4.000€4800€) = 9,09 months 

If we wanted this number to be more sophisticated we would have to take into account the increase/decrease in subscribers we expect per month and the churn rate... or the rate of customers who churn.

Case study for an entrepreneur to practice with Time-to-Tomb (TTT)

Suppose an entrepreneur has launched a startup that offers digital marketing services for small businesses and has been in the market for 6 months. He has invested €50,000 in the company and currently has €25,000 in cash on hand. The monthly expenses of the company are €10,000, which includes the team's salary, marketing expenses and overhead costs.

The following formula can be used to calculate the TTT of the company in disaster mode:

• TTT Catastrophe = Cash / Expenditure.
• TTT Catastrophe = 25,000 / 10,000.
• TTT Catastrophe = 2.5 months.

This means that if the company has no income, it could survive for 2.5 months before running out of cash. Now, to calculate the projected TTT, the company's current revenues must be taken into account. Let's assume that the company has 10 clients who pay an average of 2,000 euros per month for its services. Then, the total monthly revenue of the company is 20,000 euros. In this case, the formula to be used would be:

• Projected TTT = (Cash - Revenues) / Expenditure
• Projected TTT = (25,000 - 20,000) / 10,000
• Projected TTT = 0.5 months

This means that if the company maintains its current level of revenues, it could survive for 0.5 months before running out of cash. The entrepreneur must take these calculations into account when making important decisions, such as hiring a new employee, investing in marketing or seeking external financing. If the TTT is too low, he/she should take steps to increase revenues or reduce expenses to prolong the life of the business. If the TTT is high enough, you can afford to take some risks and explore new business opportunities without compromising the survival of the business.

PROJECTED TIME-TO-TOMB - VARIABLE MODEL

Finally, let us look at a different model, to understand how it is calculated: a model in which revenues are highly variable (as in services, for example). In this model, as in the previous one, our objective is to know how much to expect to bill on average each month in order to predict the "M... something more complicated, since billing is not usually linear. For this, there is nothing better than to have the classic commercial funnel where you can keep track of the income you expect to obtain each month, with a breakdown of its probability. (i.e. if I have €1,000 potential income next month but with a 20% probability, I count on €200...etc.). All this can be captured in a simple spreadsheet or similar, as in the following one, in which the TTT is updated according to the two variables that most affect it: the CBR (what we spend) and the expected revenues (adjusted with their probability).