Starting a Business: Financial Fundamentals

Runway is how many months you can operate before you run out of money. It's the most important number in any pre-revenue or early-stage business.

Formula: Runway (months) = Current Cash ÷ Monthly Burn Rate

Monthly burn rate is all your expenses: software subscriptions, contractor fees, office space, your own salary if you're paying yourself, marketing spend, and any other recurring costs. Many founders underestimate burn because they forget to include their own labor at market value.

A healthy startup should have at least 12 months of runway at all times. Below 6 months, you're in survival mode and should be raising, cutting costs, or accelerating revenue — not building new features.

Warning: When calculating runway, use your realistic "default alive" scenario — not the optimistic one. Assume revenue takes twice as long as you expect.

Break-even is the sales volume at which you cover all costs and start making profit. It's the first real milestone in any business.

Fixed costs don't change regardless of sales (rent, software, salaries). Variable costs scale with sales (cost of goods, payment processing, shipping).

Formula: Break-Even Units = Fixed Costs ÷ (Price per Unit − Variable Cost per Unit)

If your fixed costs are $5,000/month, your product sells for $50, and costs $20 to produce, you need to sell 167 units per month to break even.

Know this number before you launch. If it requires 10,000 customers to break even and you're targeting a niche of 1,000 — the math doesn't work and you should know that upfront.

For most solo founders and small businesses, the choice comes down to LLC, S-Corp, or sole proprietorship. The decision has significant tax implications.

Sole proprietorship: Default if you do nothing. Simple but offers no liability protection. All income is subject to self-employment tax (15.3%) plus income tax.

LLC: Provides liability protection with minimal complexity. By default, taxed as a sole proprietor (single-member) or partnership (multi-member). Can elect S-Corp taxation.

S-Corp election: The big tax win for profitable businesses. As an S-Corp, you pay yourself a "reasonable salary" (subject to payroll taxes) and take the rest as distributions (not subject to self-employment tax). On $150,000 in profit, this can save $8,000–$15,000+ per year in taxes.

The S-Corp strategy typically makes sense when your business profit exceeds ~$50,000–$70,000/year. Below that, the added complexity and payroll costs often outweigh the savings.

The self-employment tax blindsides almost every new founder. When you're an employee, your employer pays half of Social Security and Medicare taxes (7.65%). When you're self-employed, you pay the full 15.3%.

On $80,000 in self-employment income, that's $12,240 in SE tax before you even consider income tax. The good news: you can deduct half of SE tax from your income tax.

You're also required to pay quarterly estimated taxes (April 15, June 15, September 15, January 15). Miss these and you'll owe an underpayment penalty. A good rule of thumb: set aside 25–30% of every payment you receive.

Don't wait until tax season to figure out your tax bill. Know what you owe as you earn it.

For freelancers and consultants, the most common mistake is undercharging. Most people calculate their target income and divide by hours — but this ignores all the non-billable time, self-employment taxes, business expenses, benefits (health insurance, retirement), and the fact that you won't be billable 100% of the time.

A freelancer who wants to match a $80,000 employee salary needs to charge approximately $65–$80/hour (assuming ~1,200 billable hours/year), not $40/hour.

If you're selling products or services with variable costs, always model your margin before you price. A 50% gross margin is a minimum target for most service businesses; 70%+ is healthy.

Business loans aren't automatically bad — debt that funds growth with a clear ROI can accelerate your timeline significantly. But taking on debt without modeling the math is a recipe for cash flow problems.

Key questions: What's the monthly payment? Does your projected revenue cover it with margin to spare? What's the total cost of the loan (principal + interest)? What happens if revenue is 30% lower than projected?

SBA loans offer better rates than most alternatives but require time and paperwork. Business lines of credit are more flexible but often have higher rates. Invoice financing (factoring) can improve cash flow if you have slow-paying clients.