cash zero date - how to include cash flows?

In a previous entry, I provided a very basic cash zero date calculation that assumed NO cash coming in. Of course, if you do have minor cash inflows, you would want to take that into consideration. What is the best way to do that?

Again, assuming you are an early stage company your cash from sales are going to be completely unpredictable (as well as collecting the cash) however your planned expenses in the short term are. A great method of including cash inflows in to the cash zero date calculation is to make the assumption that cash activities that have occurred in the last three months could happen in the next three months. It’s short term in nature (three months) because as mentioned before a lot can happen in a very fragile start up ecosystem quickly.

So, to calculate the cash zero date you would take the current cash subtract any planned extraordinary expenses you think may occur in the next three months (e.g. that would alter your monthly burn rate - say moving expenses), divide this by the planned expenses for the next three months less your cash sales from customers in the last three months, adjusted for the number of days. As a calculation it looks like:

Current date + [ ( cash on current date - future extraordinary expenses over future 3 months ) / ( planned expenses over future 3 months - cash from sales from the past 3 months ) ] * 91 days = cash zero date

OK, let’s provide an example. Say it is March 31, 2008 and you currently have $60,000 in cash. You are planning a move in the next three months (April, May, June) which will cost $15,000 all in. In the last three months (January, February, March) you received cash from 4 different customers that totaled $110,000 and you expect to spend $217,500 over the next three months (April, May, June). The calculation looks like this:

March 31, 2008 + [ (60,000 - 15,000)/(217,500 - 110,000) ]*91 days = May 8, 2008

If you had done the basic calculation, assuming a burn rate of $72,500 and no new cash coming in, you would have got a cash zero date of April 25, 2008 - less than a month which does not take into consideration that you expect a bit of cash to come in that would extend your ‘runway’.

Again, because it is a venture capital metric, the calculation errs on the side of the worst case scenario but allows for a modest expectation that the past three months could be indicative of the next three months. The above calculation is typically called a “rolling three month cash zero date calculation” - make sure to state that should you use this metric vs. the well known basic calculation so as not to mislead your audience.