Tim Brady - How do you calculate burn rate, runway and growth rate?

Burn Rate

• Measures monthly cash outflow minus monthly cash inflow; strictly a cash flow metric, not a profit and loss metric.
• Excludes revenue from customers who have not yet paid (e.g., deferred payments).
• Founders should monitor this metric on a weekly basis.

Runway

• Represents the number of months a startup has remaining before depleting cash reserves.
• Calculated by dividing current bank account cash by the monthly burn rate.
  • Example: $200 cash / $10 monthly burn = 20 months of runway.
• Requires monthly financial forecasting to calculate accurately if cash inflows are growing or expenses are fluctuating.

Growth Rate

• Measures the speed of sales growth; a key indicator of product-market fit for investors.
• Standard calculation: (Current Month Revenue / Last Month Revenue) − 1, expressed as a percentage.
  • Example: $150 current / $100 last month = 50% growth.
• Must be expressed as a Compound Monthly Growth Rate (CMGR) to account for the growing denominator as sales scale.
  • Common error: Calculating total growth over a period (e.g., 6x growth over 6 months) as a flat percentage (100%) instead of compounding (approx. 35%).
  • Using non-compounded figures risks signaling to investors that the founder is unsophisticated or deceptive.
• Seasonal businesses may use quarterly or annual growth rates, provided the calculation method is explicitly clarified to avoid misleading investors.

Revenue Classifications

• Recurring Revenue: Predictable income from repeat purchases (e.g., monthly subscriptions); valued higher by venture investors.
  • Can be abbreviated as MRR (Monthly Recurring Revenue) if applicable.
• Non-Recurring Revenue: One-time purchases (e.g., e-commerce widgets); less predictable and valued lower.
• Misrepresenting non-recurring revenue as recurring to inflate valuation metrics is a critical risk that significantly reduces investment chances.