Today I had separate conversations with two friends who are entrepreneurs. The Paycheck Protection Program (PPP) came up both times. The program was just announced, so many things still haven’t been sorted out. We agreed, though, about the importance of understanding your runway so you can plan how to navigate the PPP process and communicate effectively with your team, your bank, and other important stakeholders.
At CCAW, I always knew the length of our runway. This equation gave it to me:
- net cash / average monthly fixed expenses = runway (in months)
Here are some inputs we can use for an example:
- cash bank balance: $200,000
- accounts payable (how much you owe others): $50,000
- monthly payroll: $50,000
- monthly rent: $5,000
- other monthly fixed expenses: $7,000
Here’s the calculation:
- Net cash: $200,000 (bank balance) – $50,000 (accounts payable) = $150,000
- Fixed monthly expenses: $50,000 (payroll) + $5,000 (rent) + $7,000 (other fixed expenses) = $62,000
- Runway: $150,000 (net cash) / $62,000 (fixed monthly expenses) = 2.4
This business has 2.4 months of runway left if things get really bad. Of course, this is a worst-case scenario. It assumes the business won’t collect any cash (accounts receivable aren’t included). And it assumes that fixed expenses won’t be reduced. It isn’t meant to be a perfect calculation. It’s just a snapshot to help inform decision-making.
This calculation was revealing to me, especially during difficult times. Every day, I knew how much time I had to right the ship before drastic measures would be required.
I encourage entrepreneurs to regularly calculate their runway and communicate it to key people, internally and externally. This simple metric is super-powerful. It can rally and focus people rapidly, which is critical during difficult times.