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The Money Metric You Might Not Know -- But Should Think you'll run out of money before you turn a profit? Then do this.

By Sam Hogg

This story appears in the November 2016 issue of Entrepreneur. Subscribe »


Paul Graham, founder of the accelerator Y-Combinator, coined a term every startup should know: default dead. It is a pretty simple concept. Assume that your expenses and revenue growth remain constant, and now fast-forward into the future: Will you run out of money before you turn a profit? That means you're default dead. (And if you will escape the red before running out of cash, congrats: You're default alive!)

Related: 4 Fast Ideas to Rapidly Grow Your Revenue

This isn't just an academic exercise. Go ahead and graph your monthly expenses and revenue over time, and find the point where they (hopefully) intersect and you become cash flow positive. The amount of money needed to get there -- between now and profitability -- is the amount you need to secure from investors or other funding sources. And until you can get that funding, you'll need to concentrate on growing revenue and keeping your operation running on the cheap. By carefully monitoring this graph, a default dead company can track its performance on a month-to-month basis and react to negative changes, such as the breakeven date suddenly moving from one year to two years.

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