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What is a Cash Runway?
A cash runway measures a period of time that a company can sustain its operations with its current net cash burn rate and no additional capital. This metric is vital for start-ups and early-stage businesses to monitor financial health in a period of fast-paced growth. Cash runway is a critical figure to monitor for long-term business viability, and has many influencing factors start-ups need to consider, though longer cash runways are critical for long-term business viability.
Why is Cash Runway Important?
There are a variety of reasons why monitoring your cash runway is essential for start-up or early and growth stage businesses.
1. Financial Risk Assessment
A short cash runway is a big indicator that a business is having financial issues, likely through negative cash flow. A longer runway is the sign of a stable and less risky investment. If a business does not keep a long runway, that makes it vulnerable to unforeseen expenses and economic downturn. This is something investors look into before funding businesses, to assess its financial health and growth, so having a long runway impacts both business growth and investor opportunity.
Through monitoring your cash runway, you can reduce the likelihood of business failure and increase financial flexibility.
2. Successfully Plan for the Future
Knowing a business's cash runway can help determine potential funding needs. When tracking a cash runway, businesses can see when their cash flow is estimated to run out and plan for additional funding. A short cash runway can prompt businesses to reevaluate their spending habits, potentially through things like reducing expenses or increasing revenue. A stable cash runway enables businesses to capitalise on growth opportunities, withstand economic downturns, and facilitate negotiations with investors.
This allows for unexpected changes like an economic downturn or supply chain disruptions that cannot be predicted.
3. Manage Cash Flow and Improve Decision Making
Having a longer cash runway gives you more opportunities to grow your business. A long runway means a business can invest in hiring new talent or launching new products, key initiatives for growth and development. A shorter runway means decisions need to be made by reducing spending or seeking new investors.
How to Figure Out your Cash Runway
To calculate a cash runway, take a business's current cash balance and divide it by how much they spend every month. There are two ways to calculate a burn rate depending on how conservative a business wants to be with its money.
- Gross burn rate: This is the amount of cash a business spends on expenses. Gross burn rate calculations give the most conservative number for a cash runway because it does not take into account any income coming into the business.
Burn Rate (Gross) = total variable expenses + total fixed expenses per month
- Net burn rate: this is how much money a business loses monthly after income and is the difference between outgoing cash and incoming cash. This cannot always be accurate for month-to-month estimations due to factors like one-time expenses and non-operating income. Look at the cash flow statement and compare the start and ending balances to calculate a net burn rate over a period of time.
Burn Rate (Net) = (starting balance - ending balance) ÷number of months
Cash runways are not static, they are constantly moving and changing as a business grows and as finances change. Monitoring a cash runway regularly is important to prevent cash flow issues down the track and prepare for any unexpected circumstances.
Extending your Cash Runway
So you have calculated your cash runway and suddenly you are looking at a maximum of 10 months before your business runs out of cash, now what?
1. Decrease your Burn Rate
When companies are starting to get off the ground, burning cash too quickly means risking bankruptcy and losing your business. Maintaining a low burn rate allows for steady growth and means all overhead costs are accounted for. Cutting costs like reducing office space, payroll expenses, and renegotiating contracts with suppliers is the simplest way to reduce your burn rate. Without lowering the cash burn rate, a business will not see an improvement in their cash runway and will struggle to generate growth.
2. Increase your Revenue
Generate more revenue by getting people excited about your product or service. Increasing sales is the fastest way to generate income and grow a business. Working on quality products that will form a loyal customer base for customer retention will benefit your business and cash runway long-term. Launching new products and services is also an excellent way to generate more revenue to grow your business.
3. Seek a New Round of Venture Capital
For start-ups, venture capital funding is great for fuelling innovation and product development. Through leveraging partnerships and networks, start-ups who obtain venture capital can expedite growth for their business. Alternatively, start-up business funding loans like venture debt or bridge financing can significantly improve business funding and support growth for a healthier cash runway in the long-term.
Ready to Grow with Mighty Partners?
Are you a start-up business who is ready to get traction and fast-track your growth initiatives? Mighty Partners offers alternative business funding solutions tailored specifically to your business for optimum growth, with streamlined repayment plans to make debt funding a breeze.
We can assist in extending your cash runway through –
- Providing debt funding solutions tailored to your business
- Bulk capital payments or incremental instalments
- Quick approval times to facilitate growth funding ASAP
At Mighty Partners, we offer tailored solutions, efficiency and focus, alongside utmost transparency and support. Get started today.
