My name is Karl Ulrich.
I'm a professor at the Wharton school.
And in this session is called Burn Rate.
You're going to here as an entrepreneur many times investor asks you,
what's your burn rate?
Sometimes they're just going to say what's the burn?
And they mean something very specific,
they mean what's your net negative cash flow per unit time?
Usually it's expressed in monthly terms.
So the answer might be my burn's around $30,000 a month,
that would be an answer that you might hear.
30,000 a month by the way that's $360,000 a year.
So that's a little bit of a scary thought
because it means that is your net negative cash flow.
The money that has to be provided by the money you already have in the bank or
by money you're going to raise in order to support the burn.
There are two closely related terms, one is called the fume date and
the other is called the runway.
And I want to just explain what these terms are.
And I'm going to apologize for all of us in the entrepreneurial ecosystem for
just mixing metaphors willy nilly here.
There's lots of different metaphors at play here.
But basically the runway is defined as how much cash do you have on hand.
That is, what's the balance in your bank account.
Divide that by your burn rate.
And that defines your runway.
And runway basically means how many months do I have before I'm out of cash?
What's the money you have in the bank divided by your monthly burn?
So let's say you have $210,000 in the checking account,
and you're burning $30,000 a month.
You're runway is seven months, that's the way that calculation works.
You're fume date is the date at which you have no remaining runway.
And so the metaphor, I suppose, is you're burning your cash and
you fume out or you burn all of your cash on the fume date.
And so these terms are related simply by cash on hand,
divided by burn rate, is runway.
And the end of the runway,
the time at which you hit the end of the runway is called your fume date.
Sometimes the burn rate is not constant and linear.
It's not just $30,000 a month.
And this might be the case when you have some unusual payments that you expect or
when know you have a certain investment coming in or you have to pay for some
inventory and you might experience greater than usual cash outflows in some month.
And so for that reason, most entrepreneurs once they're up and
running a little bit, will do much more detailed cash flow planning and
will actually do a forecast of what the cash balance is
based on the proforma financial statements for their company going forward.
And we'll use that to determine the fume date.
So I'm showing here an example from a real company, one I'm an investor in.
This graphic is provided every month in a presentation that's shared with the Board.
And essentially what it does is it shows the projected balance
of cash out into the future.
And if you read this slide, you'll see that the forecast
is that the company will run out of cash in June of year 2017.
That's the point at which the cash balance goes to zero.