“Put on your parachute – we’re going down! In one month, we’re out of cash runway…and out of business”
This is not what the owner of Sunshine and Rainbows Airline, Captain Grey, wanted to hear from his accountant at the beginning of their monthly financial meeting.
Things had been going so well for years, but money seemed to get tighter and tighter until a few old airplanes needed to be replaced. The tremendous expense, coupled with a tumultuous travel economy has really put the business’ cash flow in a bind. And according to Captain Grey’s accountant, their cash runway fuel gauge was telling them they were just about to empty.
Cash runway is an accounting concept that serves as a business’s fuel gauge, looking at all aspects of cash flow to understand how much time is left before running out of cash. And if a business runs out of cash, they are out of business.
If you are nervous about cash flow and fear that your cash runway fuel gauge is getting too close to E for comfort, allow me to serve as your financial co-pilot. I know where to look for refueling stations that can extend your runway, buying you time to bolster business’ cash flow before it’s too late. Set up a consultation with me today to learn how I can improve your cash flow and runway.
Understanding Cash Runway
Cash flow refers to the movement of money in and out of your business account: cash comes in when your customers pay you; cash goes out when you pay employees or expenses.
When considering cash flow, the crucial question you may ask is, “how long can my business sustain itself while incurring losses?” The answer to this question is your cash runway and takes into consideration your expenses and revenue. Since running out of cash equals the end of your business, a cash runway directs your business decisions to avoid an emergency landing.
Calculating Your Cash Runway
As Captain of your business, your expertise may not lie in finances but it’s important for you to grasp the basics of your business finances to make sure everything is running smoothly. This includes knowing how to calculate your cash runway.
The private pilot training market in the northern USA tends to be seasonal. In the winter, it’s too cold to fly comfortably, but during the summer plane rentals book so quickly there is a waitlist. Overall, it seems to work, but you always get a bit nervous during the slow season. How nervous should you be? Cash runway is your answer.
Let’s continue with our airplane analogy to learn a simple cash runway equation:
Step A: Examine your recent monthly net losses, which are located at the bottom of your profit and loss (or income) statement. From there, calculate the average of these losses, rounding up to be conservative. If you are consistently in a profitable position month-to-month (and you’re positive your accounting books are correct), then cash flow is not likely an issue for you.
For example, over the past year during your slow season, your net loss each month was $8,000, $11,000, $9,000, $12,000. Therefore, your monthly average loss was $10-12,000.
Step B: Next, look at your existing (reconciled) total cash balance in all of your bank accounts, including savings. For this exercise, let’s say you have $100,000 in the bank.
Step C: Divide your total cash balance (step B) by the monthly loss amount (step A) to determine your approximate runway in months.
100,000 (B) / 12,000 (A) = 8 months (rounded)
OR
100,000 (B) / 10,000 (A) = 10 months
Step D: Step back and consider your situation to determine if your cash runway is long enough.
In this example, you know that your slow season is 4 months long, and your cash runway is 8-10 months. This means your business is not projected to run out of cash and you’ll likely continue flying high!
For deeper insight, consider that your expenses are lower one month than normal, which means you saved an extra few thousand dollars. When you are calculating your cash runway, the fuel gauge analogy can help you understand what’s happening on a month-to-month basis. You caught a good tailwind, used less fuel, and have extended your cash runway!
How Can I Save Fuel And Lengthen My Cash Runway?
“Flight 27, unable to clear you for landing at this time. Please enter a circular holding pattern at your current location and await further instructions in 4 hours.”
Yikes! Hopefully you have a healthy fuel reserve for this unexpected holding pattern! How long could your business enter a holding pattern before its engine sputtered and you bailed with a parachute pack?
A good business, long term, should be putting cash in your pocket every month. But, sometimes things happen and challenges arise and you find yourself in a holding pattern. Your expenses are too high, your revenue plummets, or a global pandemic shuts you down for an unknown period of time… It’s during these times when you may need to get creative with ways to extend your cash runway. Here are a few expert tips to do just that:
The best piece of advice I can give a business owner is to have a good amount of cash in the bank as a buffer to protect against difficult times. If the pandemic taught us anything, it’s that you never know what can happen and unexpectedly put you out of business, as it did for so many businesses in 2020. If your cash runway fuel gauge is already very close to empty and then something big happens, you have to immediately land (crash) your business because you are now out of business. Think of your cash buffer as filling up your tank to full capacity before heading out on a scenic, Sunday flight.
If you have a slow season, find new ways to bring in cash. Run a special during your slow season to bring in more sales, even if you are selling things at a discount (and maybe even a loss). Depending on how dire your situation is, it may be better to have cash coming in than to make a profit. Wait, what?? Counterintuitive, right?
Financial Co-Pilot Pro Tip: If you have a short cash runway and the economy goes severely south, you may need to set a new goal: how do I break even instead of losing $400k? You might not be making a profit this way, but at least you will still be in business at the end of the downswing. Smart business owners are able to adapt to a new reality by prioritizing cash flow for survival when the skies get bumpy.
Cut expenses. Are there expenses that aren’t absolutely necessary? What cargo can you throw out the galley service door to lighten the financial weight? No one likes cutting back, but it may be a temporary necessity for your business to make it through a tough time. Some examples of expenses to cut may include: non-essential software and subscriptions, travel, advertising, office supplies, and employee overtime.
Sell assets. Selling your company vehicle (or any other assets) may give you the extra runway you need to make it through the cash flow dry spell. While far short of ideal, this should be considered if you are running on fumes.
Access your line of credit. I encourage business owners to set up a line of credit while business is good so that you have access to it if you run into cash flow problems later on. A line of credit lengthens your cash runway because you can use it to pay for expenses once you are out of cash. Think of a line of credit in the same way you would prepare to be on an airplane. The time to decide if you should pack a parachute is before you get off the ground, not when the plane is going down! If you don’t use it, it did a great job of giving you peace of mind for the “just in case.”
Financial Co-Pilot Pro Tip: If you are considering a loan, be sure to check out my tips on accounting and cash flow tips for loans.
Improving Cash Flow And Extending Your Runway
Understanding your cash runway is essential and embracing this concept provides you with a powerful tool for informed and resilient business decisions. It is your lifeline, providing you with time to navigate turbulence and make strategic decisions about the future of your business.
If you are looking at a short cash runway and are feeling overwhelmed, don’t put on your parachute just yet. Give me a call and let’s talk through your options. There are likely ways to extend your runway that you may not have thought of. The true value of financial data lies in its ability to inform and guide decisions effectively. As a financial co-pilot, I’m a trained expert you can partner with to make sound financial business decisions, lifting your business above the financial storm towards clear sunshine, and a rainbow with a pot of gold at the end!
