Photo, file: ROBYN BECK/AFP/Getty Images
There’s a simple calculation that puts together what you need to feed yourself and what the business needs to take off and lets you know exactly how long you have to make a go of it.
Think of an airplane taking off. The length of the runway determines how long the plane has to get off the ground. When the plane is out of runway, it’s out of luck.
To calculate the “runway,” you need the following (and a calculator):
- The actual amount of income your business generates (it may be zero for a period of time), called “business income”
- The cost to run your business, i.e., your overhead, called “business expenses”
- The actual amount it takes you to support yourself and those who rely on you, less any other income you may have, i.e., a job, spouse’s income
Compare the first two — your business expenses to business income — and you’re going to get either a positive or negative number. That means either your business is making money or needs money to run, i.e., it’s feeding you or you’re feeding it. It’s not a tragedy if you’re feeding it, but good to know.
Let’s presume you’re feeding your business, because every business needs to be fed for a while. That means you need to add money to the pot to keep the business running. You need to know where that money is coming from.
Now remember, while your business is launching, you also need to eat. Both you and your business are eating. The exact number comes from taking the amount your business needs each month and adding it to the amount you need. We’ll call it “the nut.”
Let’s see what we have in the fridge to feed both of you, to make your nut. Where are you going to pull the cash? Here are the most common options:
- Credit cards
- A business loan
- A personal loan
- Borrowing from friends/family
To get your runway — the amount of time you have to run your business — add up all the potential investment money from all those sources, divide it by “the net.” That gives you your runway in months.
Your runway calculation tells you exactly how many months you have to make the business a success. As things in your business and personal life change, you can re-do the calculation and hopefully the runway gets even longer. Your business is successful when it feeds itself and also feeds you.
The best time to start a business is when you have enough runway to get your airplane/business off the ground.
When you know you have the money that allows you the time, you’re ready.
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