Trading in the UK has slowly been returning to stability since the economic downturn of the COVID pandemic, with business figures revealing SME numbers had fallen to their lowest since 2016 during that period. While this period of recovery has demonstrated the resilience and adaptability of the entrepreneurial spirit, it has also underscored the importance for business owners to focus back on the basics to ensure any new ventures are based on a solid financial foundation. This period can also be used to illustrate the importance of a business’s cash runway, as well as the financial management needed to maintain and extend it. 

Going forward, we will take a look at the concept of a cash runway and look at how various industries must work to secure the cash flow necessary to support their runway. We will also explore ways to avoid financial mistakes, and learn how businesses can extend their runway to ensure the long-term success of their brand. 

Understanding The Cash Runway Concept 

The cash runway of a business is a financial measure that shows how long it can keep operating using existing cash reserves, without the need of extra funding from outside sources such as a bank. It also indicates the balance between the money going into and out of a business, serving as an important gauge of a company’s financial wellbeing and operational endurance. Having a grasp of your cash runway can be key when it comes to making informed strategic choices for your business, so ensuring it remains stable and can continue to expand without running into liquidity issues should be a priority. To simplify this idea, let’s break down the elements of a cash runway into its basics, as well as what may prolong it: 

  • Income: The money generated by your business through its operations – typically revenue is generated through selling goods or services. Consistent income is vital as it helps replenish your cash reserves thus extending your cash runway. 
  • Expenses: The costs associated with running your business – usually divided into fixed costs like rent and salaries and variable costs that change with business activity such as raw material expenses. 
  • External Funding: Funds injected into the business from sources like grants or investor funds – while not a regular source of income, external funding can significantly prolong your cash runway regardless of short-term cash flow. 

Understanding the importance of your cash runway can be highly valuable, especially if you want to be prepared going forward and have a grasp of how long your business’s current finances will last. If you notice your cash runway is short, for example, you can start taking steps to reduce costs or explore revenue opportunities. By ensuring you have a long cash runway on the other hand you are providing your business with the flexibility to invest in growth initiatives, research and development, or expand into new markets without immediate financial stress. 

Managing your cash runway effectively empowers you to lead your business confidently, ensuring that you are not merely reacting to challenges but proactively working towards long term success and expansion. 

Real World Applications 

While the necessity for a cash runway is relevant and can be useful regardless of industry, different sectors and business models will each face their own set of challenges and dynamics in securing their cash flow: 

  • Service Based Businesses: Companies that rely heavily on their own resources such as consulting brands will depend largely upon securing consistent client projects to ensure enough billable hours are made up. The key challenge involves balancing business expenses with fluctuating revenue streams that are vulnerable to seasonal fluctuations or shifting market demands. 
  • Product Based Businesses: For product based companies managing inventory costs, production expenses and supply chain efficiencies is crucial, as they will typically have an amount of capital tied up in raw materials or stock affecting their cash flow. The time it takes from producing goods to selling them also impacts their revenue stability and should be taken into consideration. 
  • Online Businesses: While they may benefit from a lack of physical operating costs, their financial health depends on factors like digital marketing expenses, customer acquisition costs and the scalability of their online systems, and because an online business’ revenue model typically relies on subscriptions or online sales, their income stream requires a constant fine tuning to ensure a healthy cash flow is maintained. 

Gauging Your Runway 

If you are seeking to gauge your business’s financial standing accurately, calculating this metric as well as others can be a great way to understand the full picture. Here, using some basic numbers for our example, is how it is done:  

  • Determine Your Burn Rate: The amount of money your business spends each month after subtracting earnings. If your business spends £30,000 monthly but only earns £20,000 in that period your burn rate would be £10,000. 
  • Assess Available Funds: Take a look at your total cash reserves, which include your bank balances and any assets that can be easily converted into cash. 
  • Determine Your Runway: Divide your cash reserves by your monthly expenditure rate. For instance if you have £120,000 in cash and spend £10,000 per month your financial runway would be 12 months. 

Potential Mistakes to Avoid 

  • Overestimating Income: Be wary of being too optimistic about your revenue forecasts as this could give you a sense of security about the longevity of your funds that does not exist. 
  • Neglecting Seasonal Fluctuations: Businesses with sales cycles that vary throughout the year should consider these fluctuations to prevent cash shortages. 
  • Forgetting Irregular Costs: Fees that occur annually like taxes, quarterly, or occasionally such as maintenance expenses, can disrupt your cash flow if not factored into your financial planning. 

By calculating how long your funds will last and taking into account the unique aspects of your business model you can provide yourself with the foresight necessary to navigate financial challenges and establish the length of your runway, contributing towards ensuring your business maintains continued operations and achieves future growth. 

Ways to Extend Your Cash Runway 

Extending the time frame during which you have adequate funds to sustain and grow your runway is essential, especially if it is your intention to expand your business. There are many ways businesses can improve their cash inflows and reduce their outflows, which will ultimately lead to a slower burn rate during which your business can thrive. Here are some key approaches to achieve this: 

  • Cost Efficiency: Review all expenses closely to pinpoint areas where you can cut costs without compromising on quality or essential services. To future proof any business it has always been essential to frequently renegotiate contracts with the aim of minimising wasted expenditure. 
  • Diversifying Revenue Streams: One way to reduce risks associated with relying on a single source of income is to explore new ways of generating it. This could be by expanding into new product markets, or offering different but related services to the ones you already provide. 
  • Team Training: Fostering a culture of learning and adaptability within your company is a natural way to ensure a business thrives. Keeping up to date with industry practices, market trends and technologies, including the most recent tools for accountants and business owners, will help prepare your team for new financial challenges. 
  • Utilising Pulse: Our very own fintech tool securely integrates with Open Banking and Accounting platforms, enabling business owners and their accountants to track crucial financial metrics such as P&L and debtors/creditors ratio, and through our intuitive dashboard provide entrepreneurs with small business financial insights to help them make more informed decisions. 

Parting Thoughts 

Mastering cash flow management is vital for the well being and sustainability of any business, and is something all entrepreneurs should continually work on getting their heads around. It is not all just about surviving the short-term, but strategically planning for a successful future via a long cash runway. By grasping and implementing the fundamentals of cash flow analysis and engaging in cost cutting measures, diversifying revenue streams, and making smart, well thought out financial decisions, you can naturally position your business to be resilient, but more importantly, ready for expansion when the opportunity arises. 

Improve your Cash Flow with Pulse 

Pulse is an innovative fintech solution that can revolutionise your approach to finances. Our AI-powered dashboard securely aggregates and analyses your financial data, integrating with top Open accounting and Open Banking software to produce invaluable financial insights directly into your inbox. For accountants and finance professionals, you can enhance your client’s engagement, streamline tedious tasks, and produce intelligent financial decisions that will improve their cash flow. What are you waiting for? Try Pulse today and empower yourself!