If your startup runs out of runway, you can’t pay your employees or develop your product (let alone market it). In other words, the end of your runway probably means the end of your business.
It takes time to find product/market fit and enter positive cash flow territory.
But how do you get more time out of the funds you have now?
Figure Out Your Current Runway
In simple terms, runway is the amount of cash on hand minus the net burn rate per month. It shows how much time a business has left to secure additional investment or become cash-flow positive.
Runway = cash on hand + average monthly revenue – average monthly operating expenses
So, if you have $200,000 in hand, $80,000 in monthly recurring revenue, and $120,000 monthly expenses, your runway would be about five months.
Hence, before the business is cash flow positive in the early stages, your business strategy and decision-making must consistently monitor your runway. Sometimes, you may have to compromise on short-term profitability to maintain liquidity.
Evaluate Cash Flow and Expenses (reduce burn rate)
Reducing the burn rate means extending the cash runway. It’s about taking steps to control the flow of cash and focusing on optimizing cash flow management.
Improving cash flow requires adjusting the main levers:
- Enhance revenue – Find a way to increase sales. This can be achieved by implementing smart marketing tools.
- Speed up cash collections – Accounting profit is profit in the books. But overdue invoices can actually disguise book profits as cash flow deficits. Your Accounts Receivable (AR) process of invoicing and collection must be closely monitored. Automation and regular follow-ups can help ensure customers pay on time, leading to better cash flow.
- Maintain healthy gross profit – Aside from increasing sales and strict AR control, achieving higher gross profits is a critical step towards achieving better cash flow and lengthening your runway.
Accomplish this by reducing your costs of production and fulfillment. But be careful that the quality of your inputs isn’t compromised, as this might lead to customer dissatisfaction. And Unhappy customers are less likely to return.
- Rank products/services by level of profit (ranking method) – Although best for companies with a portfolio of multiple products, this methodology can also be applied to any part of the business. Typically, some products and marketing channels perform better than others.
Ranking helps identify products with higher profitability that should be allocated more resources. This helps to avoid directionless utilization of resources. Likewise, a scarce resource can be considered in setting priority for production. This again helps to enhance business profitability.
Improve Sales and Marketing Metrics
At first glance, investing more in marketing when your runway is limited might seem counterintuitive. However, channels that are working well (positive ROAS) could mean increased revenue and profit.
For instance, if an average marketing expense of $1,000 results in profit amounting to $2,000, the return on ad spend (ROAS) is positive and extends the cash runway. So, spending more on marketing could positively impact the cash flow.
For example: assume that you can spend $100/day on FB ads to gain $300 worth of revenue, which costs you $50 to deliver. That’s a $150 margin.
It makes sense to double that $100 ad spend. Even if the revenue increase is less than linear (say $500), you still increase your margin.
In addition to ROAS, marketing performance can be measured in other ways: average support time, number of leads generated, productive interaction with the potential customers, positive cash flow, and extension of the runway, etc.
Another perspective is to reduce ticket time, which could keep current customers longer (reducing churn).
Get Further Funding
Before you go hunting for investment dollars, it’s a good idea to work on the three things listed above. Improvements in those areas may lengthen your runway to the point that outside funds aren’t necessary.
If you decide that outside funding is the path for your startup, optimizing those business areas will make it more attractive to investors.
But be aware that outside investment isn’t a panacea. It won’t magically improve your company’s performance or business model. On top of that, there may even be downsides to getting outside funding.
It might lead to dilution of your control and restrict your ability to make decisions. Critically evaluate funding needs in conjunction with strategic feasibility.
However, getting funding can be one of the best options in the following scenarios.
- Aggressive revenue growth can be achieved with funding.
- It’s essential to develop a prototype of your product.
- Without funding, operational sustainability will be limited.
Ready to Extend Your Runway?
The greatest difficulty startups face is cash flow management. The strength of the business idea is irrelevant if the business runs out of money. However, runway can be managed with active monitoring and the application of certain strategies.
These strategies include assessing the current business potential to generate cash, supporting operational activities, evaluating cash flow & applicable expenses, and improving sales and collection efficiency.
Likewise, raising outside funds can be considered. However, that’s the place of last resort.
If you’re ready to extend your startup’s runway but not sure where to start, let’s get connected! Founder’s CPA is an expert in startup accounting topics.