Lesson 1: Cash Flow Management

Planning for the Worst & How to Reduce the Burn by 15-30% 

One factor that will affect your experience and progress as a leader of a start-up is the set of assumptions you make about your business. These will tie into your financial projections, pitch meetings, and how you operate. The problem lies in the fact that we all think our business is a rocket ship on its way to the moon, when in reality, even astronauts can’t predict everything- but they have contingencies upon contingencies in place in case of major issues such as burning too much fuel, too fast. 

Good Buffer: The 15-30% Rule
A good buffer to build into your plan is to plan to need 15-30% more than you calculated for runway. In addition, when you go do your next round of fundraising, increase your target raise amount by 30% as well or assume you will raise 30% less and adjust accordingly. It is easier to assume you will raise less rather than forcing yourself to raise more.

Basically, if you make assumptions that lead you to burn through money too fast, or act as if you have future investments before you even have them, then your assumptions could derail your entire company. Bad assumptions lead to business failure more than anything else because the foundation of most business failure from running out of capital to bad product-market fit, lie in bad assumptions.

However, if you make safer, business-savvy assumptions that put you in a position to survive and thrive such as: assuming that your costs will be higher than you expect; your sales will be lower; that you will need twice as much time to do things you want to do; and you will raise less money, this will lead you to make more restrained decisions that will systematically benefit your business.

Best case scenario- If things work out better than expected, then you will be ahead of the game in the months and years ahead of the competition. You’ll invariably have leftover capital to invest in your company’s growth. Worst case scenario you end up never penetrating the market at all and die a slow death of not taking any risk.

Key Fundamental for Your Business
Managing your runway (available cash) is not a distraction from running your core business; it is a fundamental part of running your business. Assess your assumptions and make them work best for you. Build monetary reserves to protect yourself and your business. Your assignment today is meet with whoever is in charge of your financial operations, especially if it’s you, and calculate your runway as well as your next rounds runway. 

If you only have a few months, which is the reality for most seed stage companies, then so long as your burn is extremely low this is likely okay. However, if your burn is $50k or more and you only have 3 months, you have a long road ahead of you and may go out of business, so you need to put someone in charge and start raising!