There is lots of talk about extending the ‘cash runway’ in your business to help survive a downturn. But what exactly is the cash runway, and how do you go about extending yours?

The cash runway calculation

The cash runway is how many months your business will survive until it runs out of cash.

Your bank balance (£) / monthly running costs of your business (£) = length of time your business can survive with its current bank balance (in months).

If you have £50,000 in your bank account and your running costs are £8,000 per month, your business will run out of cash in just over six months (without any additional cash coming in).

Extending the cash runway in your business

Aim to have reserves of at least six months’ worth of running costs. But that may be unachievable for you right now. Here are seven steps to maximise your cash as quickly as possible, without long-term borrowing:

    1. Bring your finances right up to date and prepare a cashflow forecast for the next twelve months, as an absolute minimum. Identify any temporary or long-term blips in the forecast. Will you completely run out of cash? When? A cashflow forecast will help bring clarity to your cash position month on month. Take action to cover any shortfalls.
    2. Is the business viable? Don’t hide away from difficult conversations and decisions. A profit and loss account analysis and forecast will give you the answers and show what is needed to move your business from loss-making to being in profit. If your business is loss-making, the cash will definitely run out, unless you make changes or additional funding is being provided.
    3. Increase revenue:
      – Increase sales, diversify, offer new services/products.
      – Make sure that your individual services/projects are profitable. If they are not profitable, tweak them until they are. If they will always be unprofitable, ditch them now.
      – Review your pricing/rate cards regularly.- Work to increase recurring income/retainer services – more of these will help smooth out the peaks and troughs of cash flow, improve forecasting and give you more security, knowing that £x amount of cash will hit your bank account each month.
    4. Tighten up credit control procedures to make sure that everything owed to you reaches your bank account as soon as possible.
      – Invoice promptly.
      – Can your clients be set up to pay by direct debit, or by card payment link?
      – For retainers, collect the money by direct debit at the beginning of the month.
      – For project work spread over a long period, request part-payment up front and then payment by instalments across the projects.
      – If you incur third-party costs on behalf of your client, invoice for these regularly.
      – Make it easy for clients to pay and make sure you send/copy to the accounts payable team.
      – Hire somebody for an hour or two a month to chase up late payments.
    5. Increase marketing. There are still many opportunities in a downturn. Your clients and potential clients need you! Let them know who you are, what you offer and how they can get it.
    6. Review all costs and cut unnecessary expenditure. Review your suppliers and shop around. The biggest costs are usually team costs. Refer back to revenue – are you over-staffed? This is a difficult one, but don’t bury your head.
    7. Look at short-term funding options to cover any future temporary blips in your forecast – sooner rather than later. Requests to increase an overdraft facility will be met more favourably while you still have strong cash flow. Similarly, if you know you’ll be unable to meet a tax bill, contact HMRC before the due date to try and arrange a time-to-pay option.

Good finance habits

A cashflow forecast will help you to manage and optimise your cash runway; a profit forecast will help you to measure, manage and improve profitability. Get a good handle on your numbers and keep on top of the bookkeeping. If your business is in danger, you’ll be alerted more quickly and can take quick, decisive corrective action to get back on track.

If you need help with your business finances, forecasts and cashflow management, I’m here to support you – email me at . You can also find out more about my services here.

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