S6E15: Cash Burn and Runway Explained: Get Real About Your Business’s Financial Health

Disclaimer: The information in this video should not be viewed and is not intended as tax/financial advice. Consult with an expert before making any decisions regarding your finances. 

Think cash flow is just a buzzword? Think again.
In this episode, we break down cash burn and runway—the real metrics behind your business survival. Whether you’re making 7 figures or just starting out, knowing how long your money will last is a game-changer.

No bookkeeping? No problem. I’ll show you how to forecast your cash flow in minutes and make smarter, more confident decisions.

👉 Plus, grab my free Cash Flow Forecaster to start predicting your runway today:

 https://go.pamprior.com/cashflow-forecaster

Transcript

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Foreign. Hey, welcome back to the Cash Flow podcast where we are going to get really into cash. Been talking about cash, cash, cash the last three weeks and we're going to do it again today. And last week we were talking about the fact that for an entrepreneur, there's no dumb question to ask your bookkeeper. There just isn't. But I'm going to give you a couple fun, sexy terms not to talk to your bookkeeper with. But when you're hanging out at that next event, these are some of the characteristics of what you're going to find really successful businesses talk about. So you might as well have them in your pocket to understand when they talk about these things, why they're so much more important than that revenue number that they're always bragging about. Like, you know, how you get in the room. I'm an eight figure business. I'm a nine figure business. I'm a seven figure business. A couple episodes back, we talked about the fact that revenue isn't everything. So size isn't everything. Sorry, couldn't help it. So here we go. What are the two terms we're going to use today? Burn, cash burn, and Runway. Plain old English terms, but critical to your business. So what is cash burn? It sounds really sexy. Everybody talks about it like, oh, my cash burn is blah, blah, blah. Well, truthfully, what cash burn is is the amount that you're spending on expenses that is higher than the income that's coming in. So for example, if I am getting in$1,000 in revenue and I'm spending$1200 in, or, yeah, $1,200 in expenses, then I have a $200 cash burn. What that means is every month if I have a pile of cash in the bank at the very beginning and you know it's $100,000 and I'm burning. Let's change the numbers a little bit. And I'm burning $5,000 a month or a week that I'm burning right through that pile of money at a rate of however much it is per week or per month. So it's a really important number to know. We tend to know our revenue. We even tend to understand, like the money we have to spend to get that revenue. So if we have to pay consultants or manufacturers or whatever, but once we have leftover money from that, we've sold our stuff and we've paid for the things to be able to sell our stuff. We have all those fixed expenses, you know, keeping the lights on, we call it. You've got rent, you've Got travel, you've got, in my case, all those subscriptions that I keep trying to buy and not tell Francis about. You've got all that stuff you spend money on. So you want to what you want to know, not just for today, by the way, but start with today. If I have. Let's just take that example. $100,000 in the bank and I spend $1,000 a week net. I am going to run out of money in how many weeks? 100. Right. I got 100 weeks. That tells me I have a period of 100 weeks. Let's call it two years. If I don't change anything, right? Then in two years, I'm going to be out of money. What's that two year period called? A Runway, which is our second term for today. So cash burn is how quickly you burn through your money, and your Runway is how long you've got before you burn through all your money. And this is a term you'll often hear from bootstrapped entrepreneurs when they're starting something and they need to go get funding or they need to go to a bank to get money. You don't have to know all the fancy accounting terms, right? You just need to know a couple of key things that you want to know about your business anyway, which is am I making money or losing money? And if I'm losing money, how fast am I losing money? And the reason you want to know that that Runway tells you a couple things. And I'm going to make the example a little shorter. But let's say that we have a cash burn, and let's do it weekly, right? In a quarter, there are 13 weeks. And let's say I burn $1,000 a week in cash. So in other words, I spend $1,000 more than I take in every single week. So I'm burning up a thousand every week. So over that period of 13 weeks, I'm going to burn up$13,000. I forget how much I said that I started with, but let's pretend we're starting with 15,000. Okay, now I can look. Now that I know that cash burn number, I also know that my Runway is basically 15 weeks because I'm burning a thousand a week. What do I do about it? Well, that's the cool part. Until you ask this question, you don't do anything about it until you see your bank balance hit zero or your payroll checks bounce or whatever it's going to be. What you need to do is actually go and do something about it. All right? Now, the reason I say that is. It sounds really obvious, and it almost felt insulting to say that. But if we're not looking ahead that 13 weeks or 14 weeks, we don't know when we're going to run out of money. So let's put this all together in one package. We have our cash bank balance. We know how much money is leaving our bank every week, or we think we can predict it. And the period from today until my bank runs out of money is my Runway. Okay, so now we know that. How do you get your hands around it? I've never looked at this before, Pam. I don't know how much I make. I don't know how much I spend. Say you don't have any bookkeeping in place. It's okay. And in fact, we are dropping a link to a tool in the notes here. Whether you're watching this on podcast or video, we're dropping a link for you for a free cash flow forecaster, which is exactly this. It's going to show you your cash burn, and it's going to show you how many weeks you have till you run out of cash. If you're burning in the negative. Now, the reason I want to give you this tool is that it is easy to use. And I don't want to imply that you need to spend any more than five to 15 minutes a week on this. But if you're bleeding money, trust me, you want to grab this tool and get your hands around it. Because when you can see 13 weeks out, say, that's your Runway that you're going to run out. Now you can do something right now. You can say, oh, dang, if I don't raise my prices, we're going out of business. Or you can say, yikes, I was going to hire that person five weeks from now. Maybe I'm going to wait another five weeks before I hire them. Holy cow. I was expecting to take vacation. And if I do that, then look what happens. We burn extra cash in these, these two or three weeks that I was going to take off this summer. You can now start to answer those questions. And you haven't done anything fancy. You've literally looked at your bank balance. You've said, how much do I think is going to come in this week? How much do I think is going to go out this week? If the going out is bigger than the coming in, you have a burn rate. Get a real understanding of what that burn rate is. You know, how long it's going to be till you're going to need some help one way or Another and, and help can come in a million ways. It can come in new clients. It can come in higher prices. It can come in a bank loan. It can come in access to a credit card. It can come in financing from somebody you know. You go ahead and sell stock in your company. There are a million ways cash can come that you can address once you know you're going to need it. But if you're not looking, you're not going to know that you need it. And you'll sound really cool. At any event you go to talking about your burn rate and your Runway, people are going to know you've got your hands around your business and that you're taking this seriously. Because if you're in a room with anybody that has a profitable 7, 8, 9 figure business, you can be guaranteed they know these numbers in their gut. Number one, they know them in their gut. Number two, they're checking to make sure they're getting good information. So there you go. Now you're all set to go to your next event, talk about your burn rate. But even more important than that, you're ready to do something about your burn rate. And if you have one, if your burn rate is burning cash. So here's what I'd love for you to do. Hit, like, hit subscribe. Share this video with any entrepreneur you know who's struggling with not understanding what's happening to the cash in their business. This will teach them and it'll give them all sorts of options they never really even knew they had. So please do share this and if you have any questions about cash burn, if you have any questions, when you download the Forecaster, there's a little video in there, tells you exactly what to do. And it's very basic. It's basically A plus B minus C over and over and over again. Really easy stuff to grab and let me know how it works out for you. In the meantime, we'll be back next week with another cash flow podcast.