How to manage cash flow and avoid a cash gap at an early stage

According to CB Insights, almost 2 out of 5 startups (38%) shut down precisely because they run out of money. This is the most common reason companies die, ahead of product problems and competition. The key idea repeated by both a16z and fundraising practitioners: cash management is not an accounting task to leave “for later,” but the founder's main job at an early stage.

The basic tool is calculating runway: available cash divided by net burn rate (how much money the company spends per month net of revenue). For example, $600,000 in the bank with a net burn of $50,000 a month gives you 12 months of runway. An important nuance that is often forgotten: burn should be calculated from the actual change in your bank account balance, not from the profit and loss statement, because paper profit won't save you from a cash gap if money from customers comes in later than salaries have to be paid. YC partner Tim Brady puts it this way: burn rate measures the movement of cash, not profit, and it is exactly this confusion that most often trips founders up.

A practical benchmark: most startups start raising a new round when they have about 12 months of runway left, because the fundraising process itself takes months, and it's better to start it from a position of strength rather than desperation.

Sources:

1. Techstars/Brex — 8 Most Common Startup Cash Flow Problems
2. Visible.vc — How to Calculate Runway & Burn Rate
3. SaaStr — How to Not Run Out of Cash as a Founder