Why Understanding Your Company’s Runway is Important
If one thing has been made clear by the pandemic, it’s the importance of always being prepared for the unexpected. While we can make reasonable assumptions for what the future will look like, there will always be something that can’t be predicted, and as a founder, it’s your job to make sure your company is prepared for when that happens.
Regardless of the state of the economy, it’s important to know your company’s financial runway and how to extend it if the need were to ever arise. Additionally, having a healthy amount of actual cash on hand allows you to capitalize on any new opportunities that may arise.
How to Calculate Runway
Your company’s financial runway is the amount of time your company can operate, given your current level of expenditure, before becoming insolvent. Calculating this metric is fairly simple:
Funds available (e.g., cash in the bank) / Average monthly burn
So, for example, if you have $300,000 in the bank and your monthly burn is $30,000, your runway is 10 months.
However, it’s important to remember that changes to cash flow and expenses can impact this equation. Decreasing cash flow or increasing expenses can both have a negative impact.
Extending Your Company’s Runway
If you want to extend your company’s financial runway, there are three main ways to do it – cutting expenses, increasing revenue, and raising money.
To start, expenses play directly into your monthly burn, so cutting back on your spending is the first and one of the most important ways to give yourself a little more breathing room. Even if you don’t need to cut your expenses in the current environment, it’s still very important to have a list of expenses that can be cut if the economy worsens, or your company has a couple of difficult months. There are a variety of ways to cut expenses, unique to each company. A few examples can include dialing back parts of the budget like travel and entertainment expenses or, when truly necessary, cutting personnel.
The second key method is increasing revenue and then putting aside a portion of that revenue towards your company’s savings. While the majority of your business’ revenue should be reinvested into the company, having a certain level of cash on hand is essential. Think of it like your monthly pay check. While most of that money will probably go towards paying for food, rent, and other essentials, it’s still important to set aside a small portion of rainy day money, in case your financial reality changes suddenly.
Finally, the third way you can extend your financial runway is by raising capital. This can come from a myriad of options, from government grants to venture equity to bank loans to revenue-based financing.
Using Revenue-Based Financing to Extend Your Runway
A great method for smaller companies to extend their runway is revenue-based financing. Revenue–based financing allows you to access a portion of capital without diluting your company or giving up board seats, unlike traditional venture capital funding. In addition, the fundraising process is also shorter than that of venture equity, allowing you to stay focused on running your company.
Not to mention, revenue-based financing firms are less risk-averse than banks and do not necessarily require a history of profitability, meaning this type of funding is generally a better fit for SaaS companies.
In general, revenue-based financing makes sense for companies with lumpy or seasonal cashflow, and it’s perfect for use cases like hiring to support implementations, bridging equity rounds, and investing in sales and marketing to boost customer acquisition.