Many startups go through periods of financial strain during their growth. The key is not whether difficulties arise, but whether they represent a temporary setback or a sign of a deeper issue that could compromise the viability of the business.

There are certain financial indicators that make it possible to evaluate a startup’s economic health beyond revenue or growth. Analysing how they evolve can help identify risks early on and make decisions while there is still room to manoeuvre.

How to Know if a Startup’s Financial Problems Are Temporary or Structural?

When a startup experiences financial difficulties, there is rarely a single moment that marks the beginning of the problem.

Most commonly, warning signs appear gradually. Sales continue, customers keep coming in, and operations seem to run as usual. However, tension slowly begins to build: it becomes increasingly difficult to meet certain payments, external financing becomes more important, and room for manoeuvre shrinks.

In many cases, these shifts can be detected before they turn into a serious issue. To do so, there are specific indicators that allow you to assess the company’s financial strength beyond revenue or growth.

1. Liquidity: Can the Startup Meet Its Short-Term Obligations?

Liquidity measures a company’s ability to meet its most immediate commitments.

One of the most widely used indicators for assessing this aspect is the current ratio (liquidity ratio):

Formula: Current ratio = Current assets / Current liabilities

How to interpret it:

⋆ ≥ 1: The company has sufficient resources to meet its short-term obligations.

⋆ < 1: There may be difficulties in meeting certain payments without resorting to additional financing. 

However, this indicator should be analysed with caution. Not all current assets can be converted into cash with equal ease. A large volume of accounts receivable can create an impression of solvency that does not always reflect the actual cash available.

That is why, when recurring difficulties in meeting ordinary payments start to surface, it is best to look beyond the raw figure and analyse what is truly behind it.

2. Working Capital: Are Daily Operations Sustainable?

Working capital shows whether a company has sufficient resources to sustain its day-to-day operations.

Formula: Working capital = Current assets – Current liabilities

How to interpret it:

⋆ Positive: There is short-term financial balance.

⋆ Zero: The company lacks a buffer against unexpected events.

⋆ Negative: Part of the non-current assets is being financed with short-term debt. 

When working capital deteriorates consistently over time, the company usually loses its ability to absorb payment delays, cost increases, or deviations from forecasts.

In other words, it increasingly requires everything to go exactly as planned just to maintain financial balance.

3. Leverage: To What Extent Do You Rely on Third Parties?

External financing is part of the growth process for many startups. The problem arises when dependence on an external financing increases steadily.

One of the most used indicators to assess this situation is the debt-to-equity ratio:

Formula: Debt-to-equity ratio = Total debt / Shareholders’ equity

How to interpret it:

⋆ < 1: Moderate leverage level.

⋆ Between 1 and 2: Caution zone.

⋆ > 2: High dependence on external financing. 

Debt is not inherently negative. In fact, it can be a useful tool to drive growth. However, when it is used repeatedly to sustain ordinary operations or cover operational needs, it can become a factor that progressively limits the company’s options.

The Real Warning Sign Appears When Multiple Indicators Deteriorate

None of these indicators, on its own, proves that a startup is facing financial difficulties.

The real red flag appears when several of them begin to deteriorate at the same time. Tighter liquidity, shrinking working capital, and greater dependence on external financing may indicate that the company is entering a state of higher vulnerability, even if growth and commercial activity look positive.

Startups rarely fail because of a lack of data. More often, they fail because they do not act when the data is already signalling that circumstances have changed.

Detecting financial strain at an early stage is essential to preserve value and keep all options open. Taking timely action usually makes all the difference.

Act While There Is Still Room to Manoeuvre

Startups rarely go from business as usual to a crisis overnight. More often than not, there are early warning signs that something is changing: recurring liquidity issues, deteriorating working capital, increasing reliance on external financing, or a gradual reduction in the company’s ability to respond.

Identifying these indicators at an early stage allows founders and management teams to evaluate alternatives, rethink financing strategies and take action before the available options become significantly more limited.

In many cases, the difference between a temporary hiccup and a structural problem lies not only in the financial data, but in how quickly action is taken when that data begins to deteriorate.

Is Your Startup Detecting Warning Signs?

AGM Abogados helps founders, startups and investors assess situations of financial strain, evaluate strategic alternatives and make decisions while there is still time to act.

You can learn more about AGM Abogados' approach for startups facing financing, growth, or financial difficulty challenges in AGM Abogados' Legal Advice for Startups in Distress Service.

If you run a startup, there are two financial metrics you should review regularly: Burn Rate and Runway.

These metrics help you understand how quickly your company is using cash, how long it can continue operating with its available resources, and, above all, how much time you have to make decisions before liquidity or financing pressures emerge.

Many founders focus their attention on sales, growth, or the next funding round. However, the reality is that financial problems often begin long before they become obvious. Burn Rate and Runway help identify early signs of financial distress and allow businesses to take action while there is still room to manoeuvre.

In this article, we explain what these metrics mean, how to interpret them and why they can become a key tool for protecting a startup’s long-term sustainability

Is Your Startup Burning Cash Faster Than Expected?

Imagine a tech startup that has just closed a €1 million funding round.

With these new resources, the team decides to accelerate growth by hiring new sales professionals, strengthening product development and increasing marketing investment. The initial results appear promising. Revenue grows, new customers come on board and the outlook is positive.

However, as the business develops, cash begins to disappear faster than expected. Every month, the company requires more resources to sustain its growth rate and, almost without realising it, has less time available to achieve its objectives.

This situation is far more common than many founders realise. And this is precisely where two of the most important metrics for any startup come into play: Burn Rate and Runway.

Burn Rate: The Speed at Which You Burn Cash

Burn Rate measures the pace at which a startup consumes cash to fund its operations.

Formula: Monthly Burn Rate = Monthly Cash Outflows – Monthly Cash Inflows

In simple terms, it shows you how much money leaves the bank account each month after accounting for the revenue generated by the business.

A high Burn Rate is not necessarily bad news. Many startups invest aggressively in product, talent acquisition or market expansion during their early stages because they prioritise growth over short-term profitability.

The problem arises when that level of spending is no longer supported by a clear strategy, or when funding prospects begin to deteriorate. At that point, every euro spent reduces the company’s ability to react if things do not go according to plan.

Runway: The Time Left to Make Decisions

If Burn Rate measures speed, Runway measures time.

Formula: Runway = Cash Available / Monthly Burn Rate

This metric calculates how many months the company can continue operating while maintaining its current rate of cash consumption.

Returning to the previous example, if the startup has €1 million in cash and burns €100,000 per month, it has approximately 10 months of Runway.

However, if a few months later it decides to expand its workforce, strengthen its sales team and accelerate certain investments, its monthly Burn Rate may increase to €150,000. Even if the company continues to grow, the time available to react will have been significantly reduced.

And that is the key point: many startups remain focused on growth while the real issue lies in how quickly their room for manoeuvre is shrinking.

The Most Important Metric Is Not the Number Itself, but the Trend

One of the most common mistakes founders make is analysing these metrics in isolation.

What truly matters is understanding how they evolve over time.

A steadily increasing Burn Rate without a corresponding improvement in business performance, or a Runway that shortens month after month, are often warning signs that deserve close attention. Not because they necessarily indicate an imminent crisis, but because they reveal that the company has less and less time to correct potential problems.

In our experience, many startups seek professional advice only when they have a few months of cash remaining or when an anticipated funding round fails to materialise. However, identifying risks earlier is far more effective, while strategic alternatives are still available.

When Should a Startup Be Concerned About Its Burn Rate?

There is no universal figure that applies to every startups. A high Burn Rate can be perfectly reasonable during a period of rapid growth or expansion.

What matters is analysing the combined evolution of Burn Rate, Runway and the company’s actual ability to achieve its business objectives or secure new sources of funding.

Some warning signs that deserve particular attention include:

▸ A constant increase in cash burn.
▸ Delays in expected funding rounds.
▸ Excessive dependence on external financing to maintain operations.
▸ A rapid reduction in Runway.
▸ Growing tensions with suppliers or creditors.
▸ Recurring delays in payment obligations.
▸ Rising costs without a corresponding increase in revenue.
▸ Limited visibility over future cash flow.

Identifying these situations at an early stage allows founders and management teams to evaluate alternatives and take action while there is still scope to do so.

When Your Room for Manoeuvre Begins to Shrink

If these metrics start to show a negative trend, decisions relating to funding, investors, creditors and corporate structure begin to have a direct impact on the company’s continuity.

Experience shows that most business crises do not emerge overnight. In many cases, there are early indicators that allow companies to anticipate problems, reassess their funding strategy, explore restructuring alternatives and implement measures aimed at protecting both the business and its directors.

Acting at the right time does not always prevent difficulties, but it significantly increase the options available to manage them effectively.

Anticipating Is the Best Way to Protect a Startup

Understanding and monitoring Burn Rate and Runway is not simply about tracking two financial indicators. In reality, it means understanding how much room for manoeuvre a startup has to adapt, correct course and make informed strategic decisions.

The sooner the first signs of financial distress are detected, the greater the likelihood of preserving company value, protecting founders and directors, and safeguarding the long-term viability of the project.

At AGM Abogados, we advise startups, founders and investors facing financial challenges, helping them identify risks, assess available options and make informed decisions while there is still time to act.

If you would like to learn more about our approach to supporting startups facing financial difficulties or restructuring processes, visit AGM Abogados' Legal Advisory Services for Startups in Crisis page.

A trade mark watch is crucial in the protection of your brand and provides a cost-effective way to prevent the dilution and loss of trade mark rights. A watch ensures the early detection of identical and similar marks recently filed in the classes and countries of interest to you and affords the opportunity to oppose third party applications that may otherwise go unnoticed, thereby undermining your registered rights.

A watch’s coverage can be as wide or as specific as required, with some businesses choosing to watch only one or two countries and others watching global regions. One example of a jurisdiction in which we have seen an increase in watch requests is China, as more and more UK businesses identify it as a priority market. Whilst IP issues occur everywhere, China has been highlighted as having particularly high exposure to bad faith trade mark applications and trade mark squatting has been seen as a profitable and low-risk activity for a number of years. A watch provides the ability to issue a cease and desist letter or lodge an opposition through the Chinese IP Office before the trade mark is granted and consequently places the existing rights holder in a stronger position than being held to ransom after a registration has been granted.

Moving closer to home, a UK watch has been key for over a decade, since the UK IPO abolished ‘relative grounds’ examinations (which prevented the registration of conflicting trade marks). Following Brexit, the importance of watching the UK Trade Mark Register has increased even more, as on 1 January 2021, holders of EU Trade Mark Registrations and International Registrations designating the EU were granted a comparable right in the UK. This created over one million comparable UK trade mark rights and the number of potentially conflicting trade marks on the UK Register has grown considerably. It is therefore vital that suitable monitoring is in place, although bear in mind that the UK IPO will notify owners of earlier UK trade marks (whether registered or applied for) of any same or similar cloned marks.

Aside from cloned marks, the demand for UK trade marks post-Brexit has surged and record numbers of trade mark applications have been filed.

In summary, timely detection of conflicting trade marks greatly increases your chances of resolving a dispute at an early stage and in many cases, avoids the expense of costly legal proceedings.

If you would like to discuss Boyes Turner trade mark watching services, please contact Boyes Turner's commercial and technology team.