A reasonable runway

Runway is the amount of time a company can operate for. If a company has a million dollars in cash and spends $100k/month, it has 10 months of runway.

In a startup, forecasting cash can be challenging. There is no clarity about the market, product-market fit, or the client base. The business does not have enough time in the market, and it also does not have enough time as a business either!

So how do you do it?

You forecast a baseline scenario that is reasonable by using:

1.        Hard facts

2.        Reasonably expected events

3.        Events that are more-likely-than-not to happen

A starting point would be using a hard fact: the bank account. The cash position is real and not open to interpretation. It is also the starting point.

How do you calculate money going out?

1.        Start with the hard facts: you must pay rent, salaries, and basic services to operate.

2.        If the business is growing it would be reasonable to expect purchases to increase: the forecast should reflect this.

3.        The hiring plan will have some key hires. Those positions will be more likely than not filled.

How do you calculate money coming in?

1.        We will assume there are no hard facts related to money coming in.

2.        Look at reasonably expected events instead: it is reasonable to get paid after you deliver your product. Check your accounts receivable schedule.

3.        What are more-likely-than-not events? A good example would be when the company is at the final stages of negotiating with a client. The money from the contract is more likely than not to be paid.

This baseline runway will not just sober a room, it will get you the most buy-in from your audience: you are not impossibly optimistic or unnecessarily pessimistic.