Financial strategy

Our financial strategy guides how we’ll make decisions that impact our finances. This includes our optimal burn rate and how we’ll prioritize different kinds of revenue streams.

Definitions

Monthly recurring revenue

Revenue brought in through recurring service contracts. This is the only non-confirmed revenue that we project into the future in our financial modeling.

We do not include grants in this number, though in the future may find a way to incorporate grants that are specifically to cover hub service costs for communities.

Do do not include development contracts in this number, though may do so in the future once we create a development model.

Cash on hand

The amount of disposable funds that we have in our CS&S accounts. This does not include expected revenue or expenses. We calculate this at the end of each month from CS&S’s accounting reports.

Monthly burn rate

monthly recurring revenue - monthly costs. This is the amount by which our cash-on-hand changes each month. We do not include most grants in our budget revenue projections, as these are treated as one-off opportunities to grow our runway.

Runway

cash on hand / monthly burn rate. This is the number of months at our current burn rate before we run out of funds. If we know more about expected increases in funding, we can also calculate by projecting current numbers into the future and seeing when we hit $0.

Cycles of capacity growth

We expect our runway to grow and shrink as we move between cycles of capacity growth and commitment growth.

If our runway is too long, it means we are not investing enough in our operations and under-achieving our impact. If our runway is too short, it means that we are running the risk that we’ll run out of funding. Here’s what these cycles should look like:

1. Capacity growth. Invest to grow our capacity to serve, develop, and experiment. This will shorten our runway (by increasing our costs).

2. Commitment growth. Invest in growing revenue via contracts and grants at a fixed capacity. This will lengthen our runway (by increasing our revenue).

Optimal runway

Our goal is to keep our runway around 12 months, but to keep it roughly flat over time[1]. Here are the bounds for our optimal burn rate:

• 24 months: 🚨Alarm bells! We are spending too little, we should hire or pay others for work.

• 18 months: Focus on growing capacity. We can hire somebody without being too worried about finances.

• 15 months: Sweet spot, this should be our average runway over time.

• 12 months: Focus on growing revenue. We should only hire somebody if there’s an absolute need.

• 9 months: 🚨Alarm bells! We are spending too much, we should focus on boosting revenue.

• 3 months: 🚨🚨Extra alarm bells! Reduce capacity or wind-down operations. Unless more funding is imminent, we should use our funds to support team members as they search for other positions.

Balance of contract revenue vs. grants

These are goals that we shoot for, and not necessarily reflective of current reality.

Most of our funding should come from recurring service fees. This is the most reliable source of income. It gives us a low-variance way to bring in funding and an easy way to demonstrate impact.

The majority of our recurring revenue should not come from grants. Recurring revenue should come from a combination of many contracts, not singular large contracts that will drop off all at once.

Service-focused grants sohuld support under-resourced communities. Grants that cover the costs of our hub service is a special case. We should treat them like service revenue as long as we have a model for how we’ll renew grant funds. They should particularly target communities that couldn’t pay on their own.

Non-service grants should be used to invest in new services or one-off improvements. Other grant opportunities should not go towards core operations that we must continue over time. We should treat them as temporary extra capacity to:

• Make targeted improvements to our tools, processes, etc.

• Prototype a new service or improvement that we wish to generate funds with in the future.

• Provide crucial, temporary support to ourselves or another community.

Development contracts should be treated like grants. If we get a contract to perform some kind of development, we should think of it as a one-off source of funds, not recurring revenue.

Case study: how to decide whether to hire somebody

As an example of using the above principles in action, here are a few questions we should ask when deciding whether to hire somebody new.

• Do we have excess or insufficient capacity? Are we in a cycle where we wish to grow capacity and decrease stress on the team?

• Is the area of expertise for this role the place where we need the most capacity?

• Will this role grow our capacity in the area of highest need?

• Will this role contribute to bringing in more revenue from 2i2c?[2] If so, we may update our budget projections before deciding on the financial impact of the hire.

• Will hiring this role shorten our runway to less than 12 months? Assume it will take 3 months for this person to ramp-up and begin contributing at full capacity. So 12 months here is a reflection of our 9 month runway alarm window.

References

See these research notes for where some of these ideas came from.

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[1]

Best-practices in the start-up ecosystem recommends a runway between 16-24 months. The Principles of Open Scholarly Infrastructure recommend 12 months of operating costs on-hand.

[2]

For example:

• They will grow our technical capacity, allowing us to bring on more managed hubs.

• They will grow our outwards presence, giving us more exposure that leads to more managed hubs.

• They will participate in grant-writing or sales to convert opportunities into funding.