Why the Startup Runway is important and how you can optimize it

Why the Startup Runway is important and how you can optimize it

The start track decides whether you take off and fly high or crash and burn!

What is more difficult than launching a startup? Keeping it running. A new business always has a clock ticking to make it big or close shop. As of 2021, approximately 20% of new companies would close within the first year of operation.

One of the main reasons why a startup ends up closing is the lack of funds. This is precisely why it is essential to know what your startup catwalk looks like. A runaway startup it means to the amount of time before your startup runs out of money at its current income and expense rate. Let’s take a closer look at how you can calculate your startup track and extend it to help you get the most out of your business funds.

What is the start track?

Think of the start runway as the actual runway where an airplane takes off or lands. The size of this track will depend on the size and weight Similarly, the amount of money a startup needs to stay afloat depends on the product or service it offers. According to experts, on average, startups need to have a track of 18-21 months.

But to figure out the runway for your startup, in particular, you’d have to figure out what your gross burn rate and net burn rate are.

Gross Burn Rate

The gross consumption rate is the amount of money your startup spends each month. It is calculated by subtracting the remaining funds from the original fund amount and dividing by 12 months. For example, let’s say you have $100,000 in your bank account at the beginning of the year and $30,000 left at the end of the year. Then your gross consumption rate would be $5,833.33.

Net Burn Rate

The net consumption rate refers to the rate at which you are losing money. It is the difference between the amount of money that enters and the amount that leaves the organization. A calculate this, you can subtract your company’s monthly earnings from the gross consumption rate. Using the same example from the previous section, if you earn $2,000 per month, your net usage rate would be $3,833.33.

You can find out your initial clue by dividing the amount of money you had at the beginning (ie US$100,000) by your net consumption rate (ie US$3833.33). He will give you the number of months (ie 26) before your business goes bankrupt.

How to stretch your home track

To extend the track of your startup, you need to reduce the rate of consumption. That is, you must increase cash inflow and reduce spending. Here are some ways to achieve this:

Costs reduction

If certain products and services your business offers are not bringing you revenue, it’s time to cut your losses and stop providing them. Another important cost that a company must bear is employee payments. You can cut costs by hiring more interns or outsource jobs instead of full-time employees. The full-time employees you end up hiring should be those who can wear multiple hats at once. You can also consider using co-working spaces instead of renting your own office space to cut costs.

Funding Increase

Another way to reduce your rate of consumption is to bring in more money through fundraising. But instead of raising funds through venture capital, which would be diluted your capital, you can use alternative routes, such as income sharing.

Revenue sharing is a financing strategy in which a company borrows money from an investor and ties its return to the amount of income generated. So when the business prospers, the rebate amount increases; when your income drops, so does your refund. You can also consider wearing a corporate credit card to help you in critical situations.

Create an emergency fund

Finally, planning ahead is the best way to stretch out your starting track. creating An emergency fund will save you the hassle of cutting costs when the going gets tough. Ideally, the emergency fund should be large enough to cover expenses for three months to a year. It should allow you to continue with your current expenses and have room to cover any additional costs the business may incur.

In general, business owners should prepare for the worst. To do so, you need to actively track your startup track on a regular basis. If you plan and budget well before you start, you won’t have to worry too much about not having enough funds to make your startup successful. If you end up in a cash crunch, cutting costs where possible and using emergency funds should be enough to help you navigate through the choppy seas of the global startup ecosystem.

Also read:

What are the best business credit cards for startups?

Launch Tips You Can Learn From Watching Shark Tank

How to Start Your Startup From Scratch

Why do big companies go bankrupt?

Header image courtesy of Freepik

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