The cash runway of a business refers to the length of time in which a company will be able to fund its operations without raising any more money. Cash runway shows you how long your business can operate at a loss before running out of money. It is a particularly useful metric for startups to track.
In other words, it determines how long your business can last with the amount of cash it has available before running out of money. This is calculated as total cash divided by burn rate (how quickly a company is spending its money).
Say you’ve calculated the runway of your business and find that you have only three months left, what do you do to get more time? How do you extend your cash runway?
Below we share a few tips that may help:
Reduce Your Burn Rate
The most obvious way for you to extend your cash runway is to reduce your expenses and the speed at which you spend. To do this, you must identify areas where your business is making unproductive or unnecessary spending and curb them. Many tips are available to help you save money for your business like outsourcing non-core activities, maintaining an active budget etc.
Implement Low-Cost Sales Strategies
When you have a short cash runway, you are extremely conscious of the amount of money that the business spends and try as much as possible to curtail it, right? But that is not enough.
Business owners must execute low-cost sales strategies like selling added services/products to already existing customers or leveraging existing capabilities to capture a new market. You need cash inflow and you need to save as much cost as possible – low-cost sales strategy is another option for extending your cash runway.
Effectively Manage your Receivables
As you monitor your cash flow and seek more ways to get money into your business, take a look at your receivables (that is the amount your business is owed) and try to reduce the amount that is outside your business purse.
Of course, a few helpful strategies to do this is to implement an incentive system that rewards customers who pay their debts early and punish those who fail to make on-time, also make sure your debtors are clear on the terms of payment so there is no confusion.
Implementing these tips would prove helpful in extending your cash flow but the best strategy is to monitor and manage your cash flow effectively and implement most of these strategies even before your cash runway becomes threatening.