What do my key business metrics mean?
What is YoY growth rate?
Your year-over-year growth rate refers to how much your business’s revenue has grown compared to last year. It can be calculated by determining how much your ARR has increased compared to this time last year. For this calculator, your YoY growth rate should be determined by averaging your ARR YoY growth rate across the past 3 months.
How to compute YoY growth rate?
What is Runway?
Runway is a metric used to approximate how long your business can operate without taking in any more cash. It measures how many months it would take for your cash balance to reach 0, based on your average monthly expenses.
How to calculate runway?
You can calculate your cash runway using the cash runway formula. Note that the cash balance refers to all liquid cash you would normally have available to fund business operations.
Why is understanding runway important?
Your cash runway is an important metric for gauging the health and sustainability of your business. A long runway typically means your business takes in more revenue than it spends, which means your business is more resistant to sudden expenses, emergencies, or unusually low-performing months.
By contrast, a short runway indicates your cash burn rate is too high or that you’re spending more money than you can afford to. A short runway also leaves your business more vulnerable to emergency expenses and short-term fluctuations in performance.
What’s a good target runway?
Ideally, a SaaS business in an early-to-mid stage of growth should have a runway of at least 12 months, and it’s often suggested to have as many as 22 months of runway. Having a buffer of at least a year’s worth of cash reserves ensures you can make it to your next round of funding.
What is burn rate?
Your burn rate is an important component of calculating and understanding your runway. It refers to the amount of cash your business is losing each month. Your burn rate includes all typical operating expenses, such as payroll, software subscriptions, utilities, and rent. There are two types of burn rates. Runway calculations generally use net burn rate.
Gross burn rate
Your gross burn rate simply quantifies the average amount of cash you’ve spent on expenses per month over a set period of time.
Net burn rate
Your net burn rate considers both your expenses and your revenue to determine the net amount of cash you’ve lost to expenses each month. Because your revenue might outpace your expenses, it’s possible to have a negative net burn rate.
A negative net burn rate indicates positive cash flow, while a positive net burn rate indicates the opposite.
In general, your “cash burn rate” usually refers to your net burn rate, not gross. You can calculate your net burn rate with the following formula:
Financial health and funding strategies
Venture Capital (VC)
Venture Capital firms invest in high-growth startups. If your metrics showcase strong growth potential and a clear path to profitability, your business might be attractive to VCs. However, VC funding often comes with equity dilution, meaning you give up some ownership stake in your company.
A healthy cash flow, as shown in your cash flow statement, demonstrates your ability to generate revenue and potentially reduces your dependence on VC funding. Additionally, a strong runway (influenced by burn rate) allows for more leverage during VC negotiations.
Revenue-Based Financing
This alternative financing option provides capital in exchange for a percentage of your future monthly revenue. It’s a good fit for companies with established recurring revenue and a scalable cost structure. Unlike VC funding, revenue-based financing doesn’t dilute your ownership.
However, a low cash flow, revealed by your cash flow statement, might limit your eligibility for revenue-based financing, as it indicates a higher risk for the lender.
Net burn rate
Consider revenue-based financing as a way to fuel your company’s growth. Capchase offers flexible financing solutions specifically designed for businesses with recurring revenue streams. By leveraging revenue-based financing from Capchase, you can access the capital you need to scale your business without sacrificing ownership.
The Bottom Line
By understanding your key metrics and maintaining a strong financial foundation with a clear cash flow picture, you can make informed decisions about your financing strategy. Whether you choose VC funding or revenue-based financing, having a healthy cash flow and a positive runway strengthens your position and opens doors to more favorable terms. For businesses with recurring revenue, Capchase can be a strategic partner to help you achieve your growth goals.