A few months ago I created a fun device at WPEngine to focus everyone’s attention the most important thing.
If nothing changes, when will you run out of money?
Sometimes fear is a good motivator. In this case, fear takes the form of a tiny spreadsheet (below).
I know it’s looks silly to name the very day that we run out of money — why not include the hour and minute too? Clearly it’d be more accurate to say “sometime in Q1 2011.”
But the goal here isn’t accuracy, it’s motivation and focus. Nothing drives correct thinking about getting to profitability like facing your own demise. No hedging, no estimating, no complex Profit & Loss projections, just a date.
Confronted by an ultimatum, your thoughts crystallize. Maybe some of those things on your to-do list for this week aren’t as important as you thought. Maybe you could get v1.0 out the door faster. Maybe you should be spending your time getting revenue instead of ruminating on the philosophy of startups with strangers in the comment section of some blog. (Err, except for this blog of course!)
So did it work?
Four minutes after emailing this internally someone responded with a way for us to launch a week earlier than planned. Three minutes after that another email appeared with a focused list of “must-haves” before release (with a few items omitted from the previous “must-have” list).
Yeah, it works. Try it!
Of course as you improve your profitability — hopefully through more revenue but possibly through lower expenses — this date will change. Tracking that change over time is an easily-digestible demonstration of progress, and/or acceleration of progress.
Here’s our actual data:
It’s easy to see that we’re replacing our burn to some extent, with a notable down-spike when we make a new investment that eats cash. It’s a particularly nice way to visualise just how big of an investment we made, and how subsequent income replaces it (or doesn’t).
Even better: Tracking your break-even date
Tracking “death” is good motivation, but it’s so negative! If you actually have revenue — and it’s growing, and growing faster than expenses — there’s another more positive and more useful way to plot your progress: Your anticipated break-even date.
Here’s how we generate this date for WPEngine. First we track our expenses measured daily as “monthly accrual revenue for past 30 days.” Put another way, if 100% of our expenses for this month (salaries, servers, bandwidth, credit cards) were paid on a single day, how much would it be?
Second we track the same concept but with revenue. Our customers pay us monthly, but everyone is on a different day of the month (specifically, 15 days after they signed up, when their trial expired).
The result looks like this (dollars intentionally omitted… there’s a limit to transparency!):
We can see that revenue is catching up with expenses, so how do we project when that date will be?
The idea is to approximate both of these curves with straight lines and see where they’d intersect. The simplest linear estimation is to just draw a line between the first and last point in the window and project from there, but this products erratic results due to the normal bumps and dips in the graphs. So it turns out you need to use least-squares regression to generate approximation lines that are relatively immune to minor undulations. Determining the x-value for where the two lines intersect is as easy as setting the linear equations equal and solving for x.
(For those of you actually following along with the maths, remember that what you’ve just computed is the number of days from the beginning of the data window that the two lines intersect. I also convert that into an actual date, e.g. March 14th, 2011, not a relative date, e.g. 127 days from “now.”)
The result is worth the effort; here’s our projected break-even date over time:
When the date is moving out it means we’re being less efficient (either at expenses or revenues or both), and the same in reverse. Recently it’s stabilised which is a good sign that we’re starting to lock in our process, and with the break-even date much closer than our running-out-of-money date, we’re confident we won’t run out of money.
And perhaps most importantly of all, as soon as anything changes for the worse, we see it. No surprises three months later when suddenly we realise we don’t have enough money to keep going.
As you approach cash-flow break-even, your “run out of money” date accelerates into the future. As you blow past that magical moment, your business can sustain itself indefinitely without further cash investment, and the date becomes infinite.
That’s the end of the chart. Congratulations, now there’s only 47 other metrics you need to be tracking.
Oh well, we should all be so lucky.
Let’s compare notes
What other simple, motivating metrics can you use early on in your startup? What’s your death-day? Join the conversation in the comment section.
Jason Cohen is the founder of Smart Bear Software, maker of Code Collaborator, the world’s most popular tool for peer code review and winner of the Jolt Award. This post was originally published on his blog, and it is republished here with permission.
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