If you have a startup, cash runway is something that’s likely top of mind for you. But instead of worrying, get control of it! Here’s everything you need to know about cash runway:
What Is Cash Runway?
To understand how to control cash runway, you must first understand what it is. Cash runway is how long your business can stay sustainable until sales rise, or until you can raise more money. To simplify — cash runway is how long your company can operate without any incoming cash.
How Does This Compare to Cash Burn?
Cash burn is the total expenses you’re burning each month. It ties together with cash runway to create the calculation you need at the end of every month.
For example, if you figure you need $4,000 a month to run your business (cash burn) and you have $16,000 in the bank — your cash runway will be 4 months.
Why Does the Cash Runway Rate Matter So Much?
The obvious reason for knowing your cash runway rate is so you can figure out when you’re going to run out of money! But it’s also important to know because potential investors will look at both your cash burn and cash runway rates and compare them against your company’s revenue forecast to decide if your startup is a worthwhile investment.
So, How Can I Control It?
Luckily, there are some ways you can reduce or control your cash runway rate:
Increase your revenue. Bringing in more money is the obvious and likely most straightforward way to control your cash runway. Look for inexpensive ways to advertise and offer incentives to buy your product to translate this to more sales — and, therefore, cash — which will offset your cash runway rate. Or consider raising your prices a bit to bring in some more revenue from any sales you’re already getting.
Reduce outgoing costs. Renegotiate any contracts you may have. These include people you source materials and other supplies from, as well as rent or operation costs such as phone, internet, and even payroll.
Reconsider other revenue streams. If you’ve been quick to launch extra products or services on top of your main one, it may be time to go back to your roots. Concentrate only on your base product or service until you can start gaining some revenue.
Reduce your inventory. If you’re keeping high levels of inventory on hand, it may be time to reconsider that strategy if you’re not selling them as fast as you can produce them. Sell off your existing inventory to get ahead of the game and only keep a few items in stock, or consider a produce-to-order system for now.
Encourage cash sales. Cash is king — and it can go into your account right away. Billing people for their purchase or even accepting credit cards (which often comes with fees) will delay putting the funds immediately back into your business. Perhaps offer a slight discount or incentive for people to pay in cash.
Raise additional funds. As long as your startup is still very new, consider doing some financing to raise additional funds. This will contribute to controlling your cash runway — and impress some possible investors.
Hire a virtual controller. By investing in virtual CFO services (even a part-time or fractional CFO) to do a cash flow analysis, you’ll learn your complete financial picture and get expert advice about how to best control your operating cash runway.
Contact Virtual CFO Solutions Inc. today to find out how we can help your startup or small business reach the next level of financial success.