One financial number that you should always have in the back of your mind is how much runway you have left. How many months until you run out of money? Shoot for 18-24 months of runway at all times so you can focus on your business without worrying too much about money.
Calculate the runway left by dividing the money in the bank by your loss at the end of the money. For instance, suppose you are losing $10,000 per month, and you have $100,000 left in the bank. You have 10 months of runway left ($100,000 / $10,000 per month = 10 months).
There are three things you can do to lengthen your runway – generate more revenue, lower your expenses, or raise more capital. If you increase your revenue and lower your costs, resulting in a $2,500 loss per month, then you’ve just increased your runway to 40 months ($100,000 / $2,500 = 40 months).
Undercapitalization is the number one reason small businesses fail, so make sure that you always have enough runway to get your startup’s wheels off the ground.