How Long Is Your Runway? Establishing a Cash Reserve When Starting a Business

Starting a business involves a great deal of risk.  You’ve probably run across this statistic from the small business administration before: 30% of new businesses fail in the first 12 months of operations.  50% fail in the first 5 years, and 66% fail in the first 10.  The odds are not terribly good that a new venture will grow into a viable company.

For many businesses that do end up failing, the problem usually isn’t that there’s no market for new product or service and the founder’s idea doesn’t work.  The problem is that the founder runs out of money.  I’ve heard the story at least a dozen times: entrepreneur quits a stable job to start a new business.  Their objective is to make the new venture profitable enough to fund their living expenses before their savings run out.  It takes a little longer to get up and running than initially thought, and their savings accounts falls to dangerously low levels.  They can’t hold out any longer, and are forced to cease operations, take a step back, and find a job that offers a steady income.

The amount of cash you have in the bank is commonly known as your “runway”.  The longer your runway, the more likely a business will succeed.  So how long should your runway be, exactly, when starting a business?  If you’re about to take the leap into entrepreneurship, these are the exact steps I’d take to figure that out.

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