Cash Runway for Startups: How To Manage and Own

Gross margins, profits, ARR, EBITDA – the list of financial metrics can go on and on. These metrics are all very helpful in the decision-making and analysis process in determining the trajectory and direction of a startup. Each metric is uniquely designed, and success can vary by industry. In times of economic uncertainty with increased interest rates and inflationary pressures, while these metrics are extremely helpful, the focus becomes increasingly clear – how much cash do we have and how long is our cash runway?

Cash runway is the measurement of the number of months a company has until its cash runs out. The cash runaway can be calculated using anywhere from a simple calculation of the current cash balance divided by current cash burn (cash expenses less cash revenue) which relies on historical data, or a more complex calculation that relies on the cash flow forecast of cash expenses and revenues when projecting the projected cash burn rate.

Uncertainty can drive decision-makers down two very distinct paths – one of confusion, frustration and financial disorder or create an opportunity to do a top-down analysis of all financial and operational aspects of their Company. A top-down review can be daunting at first, but when carved out into meaningful and incremental steps progress can be measured and realized.

Data derived from historical trends and activity are a useful guide when making forward-looking projections. Trends and cycles present information and patterns which allow decision makers to develop high-level expectations and assumptions. There is no doubt this approach has significant benefits – the question is what does a startup rely on when their history is still evolving especially when entering a period of economic and operational uncertainty such as what we are witnessing now?

A complete review of a startup’s major cash inflows and outflows is the key first step. A review of the significant revenue streams in both their current and future is the first step in identifying future cash inflows. Once a complete and thorough review of inflows and outflows is performed – this will allow for decision makers to begin the process of budgeting and forecasting into a murky and unclear future.

The most important step is to not introduce overly complex and detailed assumptions into the first round of analysis and forecasts. High-level assumptions and scenarios X% growth in revenues, X% reduction in operating expenses and X change in headcount. The focus on high-level assumptions helps develop base expectations and lays a roadmap out to introduce more complex and detailed assumptions and scenarios.

As time and confidence progress, a decision maker can evolve the forecast process to a more detailed and complex structure. Growth by specific products with unit count and tiered pricing and SaaS hosting costs tethered to volume and growth are examples of more complex assumptions. Incremental increases in the complexity and depth of assumptions allows for consistent and manageable growth in the insights and accuracy of the forecasting process.

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Clockwork is a plug-and-play financial planning platform. Integrating with QuickBooks Online and Xero, Clockwork custom builds projections and forecasts with CFO-level precision in minutes. Built by a former CFO, its intuitive design allows anyone to accurately forecast cash flow and proactively steer their financial future as their business evolves.

The collaboration between Withum and Clockwork is the embodiment of investing in the culture to advise. Clockwork’s unparalleled ease of use and accuracy is the future of business advisory for not only clients but the next generation of financial professionals as well. Through the use of Clockwork in its technology stack, Withum doubled down on its client-centric approach by enabling real-time cash flow forecasts and tailored financial projections in a few clicks. This allows them to spend more time on what really matters, helping their clients grow strategically with a keen pulse on financial health. This new way of advisory and data-driven insights is paving the way for future finance professionals. Leveling up the standard of care to make advisors and their clients stronger, together.