There were two articles that brought the word to my attention.
The first article intrigued me because of my fascination with Parkinson's Law and how it effects me:
"When I first started [my startup], the biggest question investors asked most frequently was: 'What's your runway?' In other words, given how much money you have in the bank, how long can your company keep operating? 12 months? 24 months? 36?
"Because you are on such a time-sensitive trajectory, you literally can’t afford to be lazy. There is no time to sit around a "mission-less" meeting. If emails go unanswered, that's a cost. If you make a big expensive mistake, you've just eaten up more of your precious time."
Many of you may know that I am a SCORE volunteer, and SCORE's purpose is to give free mentoring an provide business education to entrepreneurs. This second article was the result of a Google search for "entrepreneur runway:"
Balancing Cash Runways:
"Most entrepreneurs spend a lot of time on runways, but not always at the airport. Rather, they're balancing cash runways, which, loosely defined, are the amount of time or money with which they can operate in the red. For example, if a firm that's not generating revenue is burning $20,000 per month and has $100,000 in the bank, it has a 'runway' of five months."
I'm wrapping my head around the term "runway" and the concepts supporting it.
I wonder if starting with cash-on-hand is given enough emphasis in the business plan forecasts during the excitement and passion of someone finally pursuing an entrepreneur's dream,
Part of creating a business plan is to forecast expenses and revenues. Every time I've been involved in "financial planning," I've projected expenses vs expected income on spreadsheets. But I don't remember starting with a fixed number for cash-on-hand, or considering operating in the red.
- How much total cash do I have on hand?
- How much credit do I have available to me personally, and to any business that I create?
- How can I get more cash? (e.g. sales, loans)
- How much money am I willing to "throw" into this venture?
After the business begins, I would recalculate the Runway Number every month, when the accountant delivers with the previous month's figures.
If the negative total ever reaches the number in #4 above, and I committed to walking away? Should we plan for failure, as well as plan for success? [ 5. How much cash will it take to shut the doors and walk away? ] That's got to be a bitter bill to pay.
[ PS: All links will open in a new tab. You can go read them as you come across them, then close the tab and come back here to finish.]