Many stumbling blocks came in the growth path of the Business economy since the time Covid had shaken the growth foundation of businesses. While some suffered economic repercussions, others growth skyrocketed at an incredible pace.
After Covid followed a slowdown period which in next to no time turned into a period of recovery; however, needless to say, it won't be inaccurate to call it a rollercoaster ride businesses went through after witnessing the recession wave hit during the ending phase of the year 2022. The threat of a downturn, however, is expected to be much greater in the new year.
This period of unpredictableness brought businesses to the point where prioritizing the extension of the cash runway is the way to move ahead while battling cash crunch and downturn.
If you are the owner of a business or a startup, you would agree that things have turned upside down in recent months, which led to a change in businesses' and financial investors' objectives and perspectives.
What Is The Runway In Business?
Cash runway is a key metric used to measure a company's financial health and is the amount of time a company has before it runs out of cash and experiences the worst of its days.
This makes Cash runway not just a priority for businesses but a goal that is meant to be fulfilled. And why not?
Cash is a king, after all.
It is an essential indicator of how long a company can survive without additional sources of capital. Unfortunately, this leaves businesses and startups with no choice but to get a good hold of their cash flow before they run into serious trouble.
Cash runway has become even more crucial for businesses because investors no longer have the vision of exponential growth but profitability. Thus, companies must either increase their revenue or secure additional funding from outside sources to survive the decline.
How To Calculate Cash Runway?
Cash runway calculation is an essential part of business budgeting and financial planning. It's a way to determine how long your current cash reserve will last and when additional funding may be needed.
To calculate cash runway, you need to come across and gather the following information:
Current cash balance.
Expected cash inflows (including sales and other revenue sources.
Expected cash outflows (including payroll, expenses, and debt payments.
A timeline for when these cash flows will occur.
Once you have all the necessary information, you are set to calculate your business's runway cash flow.
Start by subtracting your current cash balance from the total expected cash outflows.
Cash Burn Rate formula = cash Received – Cash Paid Out.
This will give you your estimated cash burn rate or how much cash is used each month.
Then, divide the remaining cash balance by the cash burn rate to get your cash runway in months.
Cash Runway = In-hand cash balance/ Cash burn rate.
For example, if a company has a current cash balance of $1,000,000 and a monthly burn rate of $100,000, the cash runway would equal 10 months.
$1,000,000 / $100,000 = 10 Months
It's important to remember that the runway finance is an estimate. It is a valuable tool for owners and investors to assess the financial health of a business and compare different companies.
As your business grows, your cash runway is likely to fluctuate. It is significant for startups and small businesses that cannot access traditional capital sources.
Running a cash runway analysis, tracking down your cash flows, and adjusting your estimates regularly are good ideas to ensure the accuracy of your cash flow.
The higher the Cash Runway, the better it is for your business!
If the cash runway is too short, it may be a sign of financial trouble and indicate that the company will need to secure additional funding. This can also be used to compare companies, particularly those within the same industry. Conversely, a longer cash runway may indicate that a company is in a better financial position than its competition.
Expanding Cash Runway is crucial for businesses, and achieving it does not mean cutting down on actual expenses but following a strategic move. Thus fueling your cash generator requires a hands-on approach to maximize profits and extend your runway.
Below are some of the mantras to grow and expand your revenue generation along with extending the time of your cash runway.
What Are The Premium Suggestions to Extend Your Cash Runway?
The six significant aspects to consider to extend the cash runway of a business are:
Lowering customer churn rate by retaining customers
Utilize Cost-Cutting Strategies
Plug Revenue Leakage By Switching To A Subscription Model
Generate new strategies
Monitor & Update Your Pricing Model
1. Lowering customer churn rate by retaining customers -
Lowering the customer churn rate and retaining customers is a great way to extend your cash runway. A high customer churn rate can be detrimental to a business's cash flow, representing a loss of income. By decreasing the rate of customer churn, businesses can ensure a steady stream of revenue, which may, in turn, help them extend their cash runway. One way to reduce customer churn is to ensure customers are satisfied with their experience. This includes providing excellent customer service and promptly responding to customer inquiries and complaints. Additionally, businesses should strive to meet customer expectations with their products and services.
2. Utilize Cost-Cutting Strategies -
A business's cash runway can be extended by reducing its cash burn. Practicing monitoring all the spending of your business, no matter how necessary, to put a lid on the unnecessary cash burn. This helps in cutting down on non-mandatory expenses while allocating the cash to growth-expecting initiatives.
Another step to reduce cash burn is to identify cash burn frequently. This includes eliminating the activities that don't generate revenue and expenses that are higher than necessary. For example, if a business is paying rent for a larger space than it needs, it might consider downsizing to a smaller space and redirecting the savings to other areas. Other areas of potential savings include reducing staff and outsourcing non-core activities.
3. Plug Revenue Leakage By Switching To A Subscription Model -
Switching to a subscription model can greatly extend your cash runway. A subscription model allows you to bill customers on a recurring basis, providing a steady income stream. This helps you conserve cash and make the most of your existing resources.
With a subscription model, customers can be offered additional services or discounts. This encourages them to renew their subscription or upgrade their subscription level.
By implementing a subscription model, you may increase the value of your product or service. Customers will be likelier to stick with you if they believe they are getting good value.
Although this model has a high risk of churn, the subscription model is still preferred over one-off sales to build relationships with customers, which helps retain customers and a guaranteed revenue flow.
4. Generate new strategies -
Generating new strategies to extend your cash runway is essential to the success of any business. A business must generate sufficient cash flow to cover its operating expenses and finance its growth. One of the most effective ways to ensure you are on the right track is to increase revenue. This can be achieved by introducing new products or services, expanding market share, or raising prices. Additionally, businesses can look to reduce expenses, such as cutting back on overhead costs or renegotiating supplier agreements.
Another strategy for extending your cash runway is to optimize your cash flow. For example, businesses should consider offering rewards and loyalty programs to their customers. This encourages repeat purchases and maintains customer loyalty. Additionally, businesses should consider offering discounts or other incentives to customers who refer friends and family to their services.
5. Monitor & Update Your Pricing Model -
Regular monitoring of Your pricing model is paramount to ensure that a competitive rate is being charged. If the market rate has increased, you should consider raising your prices. It's also important to understand how customers respond to price changes.
For example, you may find that certain customers are willing to pay a higher rate than others or that certain products or services aren't as profitable as others. These insights help you tailor your pricing model to maximize revenue and extend your cash runway.
This is especially important if the business sells a product or service in high demand. A business can generate more revenue by increasing prices and using the extra cash to fund its operations. However, it is essential to note that rising prices too much can result in fewer sales and a decrease in revenue.
In a Nutshell
Having a cash runway is essential for businesses. It allows them to plan for their future and maintain their cash flow. Companies with a healthy cash runway can plan for expenses and investments and budget for future growth. This factor also helps to determine whether a company is in a strong financial position and can support its current operations.
By knowing the company's cash runway insights, owners and investors can better understand the business's financial health.
