Runway: the indicator that defines the survival of your company

1. What is the runway and why is it important

Let’s imagine a start-up that is in very early stages. From day one, the company already has to assume recurring expenses, such as personnel costs, basic supplies, platforms or software, which are essential to carry out its activity. On the other hand, revenues cannot yet offset these costs, so the company is forced to consume its own resources to continue operating. It should also be taken into account that the income is not collected at the time the invoice is issued, but can be delayed for a certain time, making it even more difficult for the company to survive.

The runway tells us how long a company can continue to operate only with the resources it has in cash. It can be compared to the fuel counter that indicates the distance a vehicle can travel before running out of fuel. In addition, the runway conditions the business strategy, since a long runway allows decisions to be made calmly, while a short runway means that each decision can be crucial for the survival of the company in the short term.

2. How it is calculated

To understand the runway, you have to introduce the concept of burn rate, which can be compared to the speed at which a bathtub is emptied with the tap running. The burn rate is the company’s monthly net cash loss: the difference between revenue and costs each month. It should be borne in mind that the burn rate can change from month to month if basic costs, investments increase or new income is achieved.

The formula for calculating the runway is as follows:

Runway = Cash / Monthly Burn rate

Another relevant concept is Working Capital. It tells us when we get paid and when we pay once the invoices have been issued. This concept is relevant to understand whether a company, depending on its operations, is self-financing or must resort to external financing.

3. How to interpret the runway

According to the value of their runway, we can classify companies according to the level of risk they are in:

1. Companies that have a runway greater than 18 months are in the comfort zone. In other words, they do not need to obtain financing or extraordinary income urgently. In the event that a company has a runway that is less than 18 months but longer than a year, it should already consider starting to look for external investors.
2. When the value of the runway is less than 12 months, there is already a need to make adjustments to extend its life expectancy, especially if it is less than half a year.
3. If the value of a company’s runway is less than 3 months, its decisions are based exclusively on survival and the corporate strategy takes a back seat.

Some warning signs that entrepreneurs should not ignore are a progressive increase in burn rate or dependence on a small number of customers.

That said, large companies (mainly startups) have lived for many years in runway periods of less than 12 months and several times less than 3 months. This generates stress management and resilience that is difficult to manage, but also a learning experience in terms of resource management and optimization that many should learn.

4. How to extend the runway intelligently

Lengthening the runway is not something that can be achieved by simply taking out the chainsaw to cut costs. To achieve this, it is key to combine quick-impact tactical actions with structural adjustments aligned with the strategy.

Short-term measures include the elimination of unnecessary expenses or trying to improve conditions with suppliers. In the medium and long term, it may be necessary to rethink the business model, reduce the workforce and optimise prices and margins.

When these actions are not enough, there are mechanisms to buy time, such as capital increases or public subsidies. In any case, the higher the runway at the time of addressing these options, the greater the company’s negotiating capacity.