08 September 2015
The Zirtual debacle that played out in the press recently has left me with mixed emotions. On one hand, I sympathize with the founder Maren Kate Donovan. I’ve been a first-time venture-backed CEO before. It’s a tough job with lots of moving parts. But on the other hand, I keep shaking my head and saying, “She should have never let this happen! It didn’t need to happen!” Here’s how I’m making sure it will never happen to my startup.
What exactly happened to Zirtual? I don’t know anything other than what I’ve read in the press, but one thing is clear: they didn’t manage their burn and as a result ran out of cash unexpectedly. Now, this could happen because of surprisingly low inflows of cash or surprisingly high outflows, resulting in a spiking burn rate. But in this case it sounds like it was simply due to the CEO not knowing her cash position and her (relatively stable) burn rate, which is frankly impossible to justify and thankfully easy to avoid.
Despite what your finance people will tell you, determining your cash position is simple: just look at your bank statement. Seriously, unless you’re doing something exotic with your cash (ugh—don’t) the number will be right there at the top: ENDING BALANCE THIS STATEMENT. That’s how much cash you have. Write it down. Calculating your monthly burn is also simple: subtract the number you just wrote down from the same number you wrote down last month.
Now, finance people will tell you that they don’t close the books until a week or so after the end of the month, that some debits and credits get applied to different months than those in which the cash actually goes through the bank, and that it’s just not that simple. Ignore them. It is that simple. Yes, your numbers and theirs will be different, but if that difference is the difference between your startup abruptly shutting down or not, you’re operating dangerously close to disaster anyway (ugh—don’t).
So now you know your cash and burn numbers. You should be able to look at them and do some quick mental math to understand if you’re about to run out of cash or not. But why make yourself do that calculation in your head? Computers are great at this kind of stuff. Since you’ve been keeping track of your cash and burn in a spreadsheet anyway (right?) it’s simple to know your approximate fume date, that is, the date at which you will run completely out of cash. Just use this formula:
(CASH / BURN * 30) + TODAY
Divide your cash by your monthly burn to get the number of months’ cash remaining. Now multiply that number by 30 to get the (approximate) number of days your cash will last you at your current burn rate. Add to today’s date to get your fume date.
At Numerous we use a Google Sheets spreadsheet to calculate and track Cash, Burn, and Fume Date. Plus we use our own product to go one step further. Using the Google Sheets channel for Numerous, we've created numbers that are always up to date in the Numerous app. We share them privately with everyone in the company and our investors so no one will ever be surprised by them. And the Fume Date number isn’t just a date; it’s a live countdown. So everyone knows exactly how much runway we have left—124 days at the time of this writing. (You can see our live, up-to-date Fume Date in embedded Numerous number at the left.)
But you don’t have to use Numerous. Just set up a simple spreadsheet, ideally one that can be shared online. Once you’ve set it up, all you have to do is make sure to update it every month when you get your bank statement. Your startup might still run out of cash, but at least it won’t be unexpected.