Zero Cash Date - Detailed Guide | Jordensky

Zero cash date, also called cash out date, refers to the day a startup runs out of money.

Zero Cash Date - Detailed Guide | Jordensky

Zero cash date, also called cash out date, refers to the day a startup runs out of money. Founders, CEOs, CFOs, or really anyone associated with the company wants to make sure the company has plenty of cash and doesn’t hit the zero cash date. Company founders and the executive team should know what the cash out date is, and therefore should know how to calculate a zero cash date. Jordensky provides free financial modeling to help startups build financial models.

Start With Your Burn Rate

The first step in calculating your cash out date is determining your burn rate. Your burn rate is the rate at which your company spends money over time and can be calculated on an accrual or cash basis. It's a good idea to look at both of these burn rates. If you bill someone for a product or service and they haven't yet paid you, you have a receivable in accrual accounting. And receivables can be recorded as revenue even if you haven't yet received payment. You may also be accruing expenses for which you haven't received an invoice but know you'll have to pay.

In general, the income statement for a venture capital-backed company should be accrual-based. Accruals may conceal the fact that you have less cash on hand than you think, and your cash out date may be approaching sooner rather than later.

The cash basis burn, on the other hand, is taken directly from your cash flow statement and is typically net income with some adjustments in working capital such as accounts payable and receivable. You should also account for any capital outlays, such as large computer, server, or lab equipment purchases. The cash basis burn rate is typically defined as operating cash flow minus investment cash flow.

Calculate Average Burn Rate

Average burn rate can be calculated on a three- or six-month basis, and Jordensky does both. The six-month burn rate is used to "smooth out" some of the variables. For example, you could have a month with very good sales and another month with a lot of equipment purchases. Your burn rate may not be accurately represented by a three-month average.

A three-month average, on the other hand, may more effectively capture recent events, which may be "diluted" by a six-month average. If your company hired a number of new employees in the last few months, your expenses will rise in the future. Alternatively, if your revenue is rapidly increasing, this will have an impact on the cash out date. A six-month average may not accurately reflect those costs. Whatever method you choose, once you have your burn rate, you can calculate a cash out date.

How To Calculate Your Cash Out Date

Simply divide your cash balance by your burn rate to determine your zero cash date. The resulting number represents how many months of cash you have remaining. Your cash out date is the last day of that month. This date is extremely beneficial to the executive team, founders, and venture capitalists. It's one of the first questions you'll be asked at every board meeting and update.

However, if your company is rapidly hiring, gaining more customers/revenue, or making large investments in infrastructure or G&A, that simple calculation may not work. If that's the case, you'll need to create solid startup financial projections that account for all of the upcoming financial changes in order to calculate your cash out date. Begin with the actual cash balance and then use the model to project the change in your bank account balance at the end of each subsequent month.

Extending The Zero Cash Date

There are a few ways that you can extend your cash out date:

Zero Cash Date - Detailed Guide | Jordensky
Ways that you can extend your cash out date
  • Prepayment from Customer  - Collecting payment in advance whenever you sign a customer is always a good idea. Companies will frequently incentivize their sales teams with higher commission rates on cash paid up front, particularly in enterprise software companies. Your cash out date is extended if you withdraw the money faster.
  • Venture Debt. Venture debt can be used in addition to equity fundraising to extend your runway by three to six months before your zero cash date.
  • Bridge Rounds. Bridge rounds, also known as extension rounds, are another round of venture financing from the same investors who participated in the previous round. Companies in the seed stage may be gaining traction, but they are concerned that Series A funding will not provide adequate valuation. These firms may approach existing investors and ask them to participate in an extension. In these cases, bridge rounds can postpone the cash out date, giving startups more time to meet specific milestones, and the startup's Series A valuation may be higher than it would otherwise be. In other cases, the company may not be performing well, and bridges are really bridges to a sale. Investors may extend the company's runway, anticipating that the founders will attempt to sell the company before the zero cash date.
  • Cutting Expenses. Cutting expenses appears to be a simple task, but it can be difficult to see where those cuts can be made. If possible, consult with a financial advisor such as Jordensky. However, there is another way to extend your cash out date.

Although no one wants to talk about it, having a cash outdate, knowing when it is, being realistic, and communicating that with your board and executive team is beneficial and necessary. It instils discipline and focus, allowing you to see what truly matters and what will move the needle in the short term. If you have any questions, please contact us at Jordensky.

About Jordensky

At Jordensky, we are committed to providing an experience of the highest caliber while specializing in accounting, taxes, MIS, and CFO services for startups and expanding businesses.

When you work with Jordensky, you get a team of finance experts who take the finance work off your plate– ”so you can focus on your business.

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