Updated: Aug 23, 2022
An image of a plane making an attempt to take off just a few yards before the mountain edge has become a common representation of startups managing their financial runway to avoid going bust.
That’s because managing a startup’s runway is no different from this situation. It requires making hard choices, at speed while operating within a high-pressure environment. If you choose to press the brakes, you will bring the plane to a sudden screeching halt. And if you choose to continue, you may take off or you just might find yourself taking a nose dive into the valley.
Similarly, for founders, managing burn rate and projecting runway is much harder than it sounds. It’s easy to mis-calculate and produce misleading runway estimates given the number of moving parts and different factors at play.
In this post, we share the top 3 mistakes that founders make while determining their runway and how to avoid them:
Only using actual spend data for forecasting future burn rate
Many founders forecast runway based on their current spending. Extrapolating current expenses over a 12 to 18 month period might sound like the right way to go about determining your runway. However, without factoring in new expenses that may be coming up in future months, this can be a treacherous approach.
To avoid risks of incorrect runway calculation, differentiate cash burn based on actuals (today’s spending) and cash burn based on expected new spend in the future. Utilise this information in unison to arrive at a realistic estimate for the runway.
As an example, say your burn rate so far is a steady £10,000 per month and you have £60,000 cash in the bank. Based on just this information, you will determine that your startup has another 6 months of runway left.
However, you may have a one-time expense of £15,000 in legal fees coming up in the next month. Once you factor in this new spend, your runway is slashed by 25%, leaving you with only 4.5 months to close your next funding round.
Overlooked or underestimated costs
It’s in the DNA of startup founders to be optimistic about their business. However, while projecting a startup’s runway it is wise for you to prepare realistic forecasts, even and especially when it does not look favourable. It’s understandable why many founders are inclined to overestimate revenue and underestimate costs – it makes the business look attractive to an investor. Unfortunately, this mindset does not help with managing the operational reality.
A few examples of frequently underestimated or overlooked costs that get startups into trouble are:
Fundraising related costs such as due diligence or legal fees
Taxes such as VAT on taxable expense items (e.g. consulting services), annual corporate tax, if profit generating
Mandatory people costs such as national insurance and pension contributions
Ignoring costs related to upskilling and training employees
Not accounting for increased expenses associated with external softwares used or increase in supplier bills
Relying on ad-hoc spreadsheets and processes
Spreadsheets are the most common tool for early-stage startup founders to track their burn rate and thereby project their runway. Spreadsheets carry inherent risk of manual errors or broken formulas that can result in wrong numbers and misleading business insights.
Not having a well-structured spreadsheet template and a well laid-out process to regularly update the information in a consistent way only amplifies the risk of working with incorrect information.
To avoid the risk of having wrong numbers for your decision-making, implement a structured template for tracking your burn rate. For building this template, you can leverage techniques such as macros and expense categorisation to avoid getting lost and not being able to see the wood from the trees.
A well-structured burn rate and runway tracker is also an asset when raising capital. It demonstrates a founder’s ability to manage the business efficiently and a finger on the pulse of cash in and out. Without such a system in place you can expect to face a barrage of uncomfortable questions that you may not be prepared for.
In summary, entrepreneurship is inherently risky and it's extremely difficult to predict when things will go awry. With that in mind, startup founders need to always have an eye on the future while projecting startup runway. Avoiding the three pitfalls highlighted in this article will enable you to maintain a tight grip on your burn rate and arrive at a realistic runway projection.
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