Finance
Burn, runway, the 13-week cash flow, budgets against actuals, unit economics and the board pack.
8 lessons6 nested pages104 min2 exercisesFree
How much runway do we have, and what will the next twelve months cost? This track answers it on the books of Northwind Traders, Inc., the one company every track in the course is taught on.
The 8 lessons
- Burn rate and runway, from the bankHow do I calculate burn rate and runway for my startup?
- Default alive or default deadWhat does default alive or default dead mean for a startup?
- The 13-week cash flowHow do I build a 13-week cash flow forecast?
- Budget vs actualHow do I do a budget vs actual variance analysis?
- The operating model: three statements, linkedHow do I build a three-statement financial model for a startup?
- SaaS metrics and unit economicsWhat SaaS metrics do investors look at, and how are they calculated?
- How a raise changes runwayHow does raising a SAFE change my startup's runway?
- The monthly board packWhat should a startup's monthly board or investor reporting package include?
The words this track teaches
Each links to its glossary definition, with the authority behind it.
- Gross burnGross burn is a cash and runway metric, calculated as All cash out in the month, before any cash in.Convention
- Net burnNet burn is a cash and runway metric, calculated as Gross burn − cash in, excluding financing inflows.
- RunwayRunway is a cash and runway metric, calculated as Cash ÷ net monthly burn.Convention
- Run rateOne period's figure with named one-offs removed, as a measure of what a normal period looks like — run-rate burn, run-rate revenue. Always shown beside the reported figure, with the one-offs listedConvention
- Months of cashMonths of cash is a cash and runway metric, calculated as Same as runway.Convention
- Capital expenditureCash spent acquiring or improving long-lived assets in the period — the investing outflow free cash flow subtracts
- Prepaid expenseCash paid before the benefit is consumed — an asset until it is. "Prepayment" is the UK and IFRS word for the same asset; a customer paying us early is a customer advance or deposit, a liability
- Stock-based compensationThe cost of equity awards — options, RSUs, restricted stock — measured at grant-date fair value and recognized as expense over the service period. Non-cash, so added back in operating cash flow, but a real cost
- Default aliveWhether, with expenses held where they are and revenue growing at its recent rate, a company reaches profitability on the cash it already has. If not, it is default dead and its runway ends in a raiseConvention
- Cost of revenueThe direct costs of producing the goods or delivering the services sold in the period — the line gross profit is measured after
- Working capitalWorking capital is a liquidity and working-capital metric, calculated as Current assets − Current liabilities.Convention
- Contribution marginContribution margin is a profitability metric, calculated as (Revenue − Variable costs) ÷ Revenue.
- 13-week cash flowA direct-method forecast of cash receipts and payments week by week for the next quarter, built from the bank balance, bills, payroll and tax dates and expected collections, and rolled forward every weekConvention
- Direct methodPresenting operating cash flows as gross receipts and payments by major class — cash from customers, cash paid to suppliers and employees. Encouraged by ASC 230, but it must still be accompanied by the reconciliation from net income
- Payroll liabilitiesWhat an employer owes on wages it has already paid — the income tax and the employees' share of Social Security and Medicare withheld from their pay, plus the employer's own payroll taxes — until it is deposited with the government. The withheld part was never the employer's money: IRS Pub. 15 calls it trust fund taxesConvention
- Payment termsThe agreed timing of payment and any early-payment discount — Net 30, Net 30 EOM, 2/10 net 30, due on receipt; the due date that aging is measured fromConvention
- DividendA distribution of earnings to shareholders, declared by the board — a liability from the declaration date and a reduction of retained earnings, never an expense
- ForecastThe current best estimate of a period's results or cash, revised as actuals arrive. A budget says what was planned; a forecast says what is now expectedConvention
- Sales tax payableSales tax charged to customers and not yet remitted to the state — a liability from the moment it is collected, never revenue, when the entity has elected to exclude such taxes from the transaction price
- BudgetThe plan for a period, line by line, approved before the period starts and held fixed while it runs, so actual results can be measured against it. Built on the same basis as the books — an accrual budget for accrual books — or every variance is partly a basis differenceConvention
- VarianceActual less budget (or forecast) for one line, labeled favorable or unfavorable by the line's polarity: revenue above plan is favorable, a cost above plan is not. The sign is arithmetic; the label is the findingConvention
- Flexed budgetThe budget restated at the volume actually achieved, so a variable cost is judged against what it should have been at actual sales. Separates "we sold less" from "each sale cost more"Convention
- Flux analysisExplaining period-over-period variancesConvention
- MaterialityWhether a misstatement or omission would likely change the judgment of a reasonable user of the statements — judged on size and nature together, never a fixed percentage
- Accrual basisRecognizing revenue when earned and expense when incurred, regardless of when cash moves
- Operating modelA forecast in which the income statement, balance sheet and cash flow statement are linked: profit flows to retained earnings, working-capital balances come from assumptions, and cash is derived from the cash flow — never typed — so the balance sheet balances by constructionConvention
- DriverAn input assumption a forecast line is computed from — a growth rate, days of receivables, headcount, price — rather than typed. Changing a driver moves every line that depends on itConvention
- Cash flow statementWhere the cash went in a period — receipts and payments classified as operating, investing or financing, reconciling opening to closing cash, with operating cash also reconciled to net income
- Retained earningsAccumulated net income not distributed to owners — where the P&L lands on the balance sheet
- Indirect methodPresenting operating cash flows by starting from net income and adjusting for non-cash items and changes in working capital — the method most entities use. ASC 230 also calls it the reconciliation method
- Deferred revenueConsideration received, or unconditionally due, before the goods or services are transferred — a liability until the performance obligation is satisfied. ASC 606 calls it a contract liability
- Gross marginGross margin is a profitability metric, calculated as (Revenue − COGS) ÷ Revenue.Convention
- ARRARR is a recurring-revenue metric, calculated as MRR × 12.Convention
- MRRMRR is a recurring-revenue metric, calculated as Sum of normalized monthly recurring subscription value.Convention
- Net revenue retentionNet revenue retention is a recurring-revenue metric, calculated as (Starting + Expansion − Contraction − Churn) ÷ Starting.Convention
- Gross revenue retentionGross revenue retention is a recurring-revenue metric, calculated as (Starting − Contraction − Churn) ÷ Starting.Convention
- CACCAC is a unit-economics metric, calculated as Sales & marketing spend ÷ new customers.Convention
- CAC paybackCAC payback is a unit-economics metric, calculated as CAC ÷ (Monthly ARPA × Gross margin), in months.Convention
- Burn multipleBurn multiple is a cash and runway metric, calculated as Net burn ÷ Net new ARR, over the same period.Convention
- Expansion MRRExpansion MRR is a recurring-revenue metric, calculated as Upgrades and seat additions from existing customers.Convention
- Contraction MRRContraction MRR is a recurring-revenue metric, calculated as Downgrades, not cancellations.Convention
- Churned MRRChurned MRR is a recurring-revenue metric, calculated as Full cancellations.Convention
- LTVLTV is a unit-economics metric, calculated as (ARPA × Gross margin) ÷ Revenue churn rate, both in the same period unit.Convention
- SAFECash from an investor in exchange for a right to shares in a future priced round, usually at a valuation cap or a discount. Not debt and not yet stock; because a SAFE can require cash on a change of control, it is often classified as a liability under ASC 480 and remeasured at fair value — the terms decide
- LiabilityA present obligation of the entity to transfer an economic benefit (FASB CON 8 ¶E37)
- Board packThe set of statements, metrics and commentary delivered to the board or investors each month or quarter: the three statements, cash and runway, budget variances with explanations, and each metric with its definition, period and basisConvention
- CloseThe process of finalizing a periodConvention
- Non-GAAP financial measureA numerical measure of performance, position or cash flow that adjusts a GAAP figure — EBITDA, free cash flow, adjusted net income. A registrant publishing one must reconcile it to the most comparable GAAP measure