Cash Runway and Burn Rate Management: Know Your Runway
Master runway management. Calculate burn, extend runway, plan fundraising based on runway.
Key Takeaways
- Burn rate calculation: (Cash spent - Cash earned) / Month = Monthly burn. Example: £500K cash, £50K revenue, £100K expenses = £50K net monthly burn. Runway: £500K / £50K = 10 months. Impact: Low runway (< 6 months) = immediate fundraising pressure. High runway (12+ months) = time to optimize. Cost: Tracking (simple spreadsheet). Benefit: Know when money runs out, plan ahead. Critical: Update monthly, monitor weekly when runway < 12 months.
- Runway extension strategies: (1) Reduce burn (cut costs, kill low-ROI initiatives), (2) Increase revenue (faster sales, price increases, new channels), (3) Raise capital (fundraising, investor support), (4) Combination (most effective). Example: £50K monthly burn + 10-month runway. Options: Reduce to £35K burn (14 months runway), increase revenue £20K/month (break even sooner), raise £500K seed (24+ month runway). Reality: Usually combination (cut 20%, grow 30%, raise £300K = 20+ months).
- Runway scenarios and planning: Conservative (assume revenue flat, spend stays). Moderate (assume 10% monthly growth, 5% monthly spend growth). Optimistic (assume 20% growth, 10% growth spend). Plan for worst case (conservative). Example: 10-month runway with £50K burn. Conservative: still need fundraising in 10 months. Moderate: might extend to 15 months. Optimistic: might hit breakeven. Strategy: Plan fundraising 12 months before money runs out (allows 6-month process + buffer). Start conversations at 18 months of runway.
Managing Cash and Calculating Runway
Planning for cash sustainability. **Understanding burn rate** Definition: - Gross burn: Total monthly expenses (before revenue) - Net burn: Monthly expenses minus revenue (what actually drains cash) - Example: £200K expenses, £50K revenue = £150K net monthly burn Calculating runway: - Runway (months) = Current cash / Monthly net burn - Example: £600K cash, £100K net burn = 6 months runway - Critical point: <6 months runway = urgent, >12 months = comfortable Monthly tracking: | Month | Revenue | Expenses | Net Burn | Cash Left | Runway | |---|---|---|---|---|---| | Month 1 | £50K | £200K | (£150K) | £450K | 3 months | | Month 2 | £60K | £210K | (£150K) | £300K | 2 months | | Month 3 | £70K | £220K | (£150K) | £150K | 1 month | Red flags: - Runway < 6 months without funding plan = crisis - Burn rate accelerating = unsustainable - Revenue flat while burn growing = problem - No fundraising plan when runway = 12 months = late **Burn rate optimization** Where to cut (prioritize): 1. Salaries and headcount (50-60% of spend typically) 2. Infrastructure and hosting (10-15%) 3. Third-party software (5-10%) 4. Marketing and customer acquisition (10-15%) 5. Overhead (5-10%) Balanced approach: - Cut 20-30% burn without destroying growth - Example: From £150K/month to £110K/month - Eliminate: 2 hires delayed (£40K) - Reduce: Marketing by 50% (£15K) - Optimize: Software subscriptions (£5K) - Result: £30K burn reduction Growth levers (increase revenue): - Sales productivity: More customers faster - Pricing: Higher average deal size - Expansion: Upsell to existing customers - Efficiency: Better CAC payback Example growth impact: - Current: £50K MRR, 40% growth (£20K/month growth) - If accelerate to 60% growth (£30K/month growth) - Cash impact: Extends runway by 3+ months if burn stays flat **Runway planning framework** Timeline: - 24+ months: Comfortable (can invest, grow) - 18-24 months: Plan fundraising (start conversations) - 12-18 months: Active fundraising (in process) - 6-12 months: Urgent (close or extend drastically) - <6 months: Crisis (drastic action needed) Planning decision tree: 1. Current runway: 10 months 2. Fundraising timeline: 3-6 months 3. Buffer needed: 3-6 months (contingency) 4. Action point: Start fundraising now if 10 months (allows 3-month process, 3-month buffer) 5. Alternative: Cut burn to extend runway (buy time) **Scenario modeling** Conservative scenario (no growth): - Revenue stays flat - Expenses stay flat - Runway: As calculated (6 months if £600K cash, £100K burn) - Plan: Must fundraise before month 6 Moderate scenario (growth): - Revenue grows 10% monthly (£50K → £55K → £60K...) - Expenses grow 5% monthly (staff hires slow) - Runway: Extends, potentially 9-12 months - Plan: Fundraising still critical at 12 months Optimistic scenario: - Revenue grows 20% monthly - Expenses grow 3% monthly - Runway: Could hit 18+ months or breakeven - Plan: Can be more selective with funding Example model: | Month | Revenue | Growth | Expenses | Burn | Cumulative Burn | Cash Left | Runway | |---|---|---|---|---|---|---|---| | 0 | £50K | - | £200K | (£150K) | - | £600K | 4 mo | | 1 | £55K | 10% | £210K | (£155K) | (£155K) | £445K | 2.9 mo | | 2 | £60K | 10% | £220K | (£160K) | (£315K) | £285K | 1.8 mo | | 3 | £66K | 10% | £231K | (£165K) | (£480K) | £120K | 0.7 mo | Conclusion: Even with moderate growth, runway extends only to 3-4 months. Need fundraising now. **Action plan** Weekly monitoring: - Cash balance (verify bank) - Revenue (pace vs forecast) - Expenses (any surprises?) - Runway (update calculation) Monthly review: - Detailed P&L (vs plan) - Burn trend (accelerating or decelerating?) - Runway forecast (next quarter) - Decisions: Continue current pace? Cut? Grow faster? Quarterly planning: - Scenario analysis (conservative, moderate, optimistic) - Fundraising plan (if needed) - Hiring plan (impacts burn) - Revenue targets (impact on runway) When runway < 12 months: - Start investor conversations (warm intros) - Prepare materials (deck, financials) - Set fundraising target (how much, what valuation) - Plan B: If fundraising fails, how cut burn to breakeven?