When you work for an employer, you know how much money you’re going to earn in any month. You have a set salary or hourly rate and earn approximately the same amount of money each month. You also operate under the assumption that you’re going to have the same job or a similar job indefinitely where you earn the same amount of money.
When you’re an entrepreneur, these guarantees simply don’t exist. Your income is irregular by nature and it can be very difficult to project how much income you’re going to earn in the next several months. You can’t ever really know for sure if your business is going to keep generating about the same amount of money it currently is, whether or not you’re going to see a significant jump in revenue or if your income is going to tank because of some future unknown event. You just don’t know when a competitor is going to eat your lunch or when your business model is simply going to stop working. For these reasons, it’s especially important for entrepreneurs to keep track of some basic financial metrics so that you know how long you can weather the storm if you suddenly have a drop in income. The metric that best identifies how financially stable you are as an entrepreneur is your financial runway.
Financial runway is a measure of how many months can you go without earning any additional income before you run out of money.
Let’s say that your business disappeared or you lost your job tomorrow and you have twelve months of expenses set aside. That means that you have one year to grow your business to the point where it generates enough income to provide for your monthly expenses before you run out of money. At the end of your one year financial runway, your business will either have taken off and sustain your monthly living expenses, or you’ll have crashed at the end of the runway and will have to go out and get a new job.
If you would like to know how much financial runway you have, I’ve setup a JavaScript calculator that you can use to calculate your runway below the video. The calculator assumes that you’re earning some amount of interest on your savings and investments and assumes that your expenses will increase by 3% per year because of inflation.
Financial Runway Calculator
Don’t like to read? Watch the video