Looking for a copy of Lean Canvas? Here’s one you can copy to your Google Drive and use as many times as you’d like.
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Talking about making money is fun. Talking about spending it isn’t. But spending isn’t all bad. If you spend your money making wise investments in your business, you might reap the rewards for years to come.
That’s what I want for you. So let’s dig in.
When it comes to Cost Structure, the first concept you need to be aware of is “runway.” According to StartupDefinition.com, “runway” is “the amount of time until your startup goes out of business, assuming your current income and expenses stay constant. Typically calculated by dividing the current cash position by the current monthly burn rate.”
Think about it this way. If you were piloting a plane, would you feel safer taking off from a longer runway or a shorter one? Longer is better, right? It’s the same way with your startup. The more runway you have the better.
The next question: How do you know if you have enough runway? That’s where “burn rate” comes in. That’s the amount of money you are spending at regular intervals. If you have $100,000 in the bank and your burn rate is $10,000 per month, your runway is 10 months.
The next question: what’s your burn rate? To calculate that, you need to figure out what your fixed and variable costs are. That will be a guess, of course, but you still need to consider:
- What needs to be done?
- Who’s supposed to do it?
- How will you do what needs to be done?
Let’s take our employment-finding business, for example. Our costs may include: salary for the owner, web development and hosting costs, marketing and advertising expenses, training materials production, office rent, office equipment rental, etc.
My recommendation is to go as lean as possible when starting out to give yourself maximum runway. In the example above, if you can cut your expenses in half to $5,000/month you’ve doubled your runway to 20 months. That’s way less stressful, isn’t it?
A couple more things: Don’t worry about accuracy. Make an educated guess based on the information you have available and then pencil it in. It will change, and you will change with it. No stress.
Consider calculating your breakeven point. If you know you’re going to have fixed and variable costs of $5000/month, and you are going to price your offerings at $500/month, you know you’ll need to get to 10 paying customers to hit breakeven. That’s a critical point in the life of your business, when you can move your business from the red into the black. And it’s a cause for celebration!
My experience is that some entrepreneurs shy away from counting the costs. They’d rather think big picture, or bury their heads in the sand, or both. You don’t need to do that. Know your numbers and they are likely to improve. Neglect your numbers and you might be running out of runway before you have a chance to fly.