Most business owners will know the term ‘cash runway’—it’s basically how long your business can stay afloat without needing more cash. We recently spoke with some business owners who often refer to their cash runway as their ‘death date’ or ‘drop-dead rate.’ While this may sound scary and off-putting, identifying means you can take proactive steps to avoid it!
Why do you need to know your ‘death date’ (cash runway)?
Firstly, it ensures that you know where your business stands, and how long it could survive should the worst happen, such as losing a big client or project. This could result in a drop in income and you’re left without any income (called a cash gap).
Although it can be scary seeing your finances laid out in black and white this way, it’s the first step to making sure you know your absolute bottom line. it also lets you see when you might need to seek out funding, plan ahead for a marketing push, or re-engage with old clients before it’s too late.
It’s not always doom and gloom and even without any looming crisis, knowing your cash runway can help you stay ahead of your business’s financial situation, giving you peace of mind. If you see that your ‘death date’ is getting closer, it’s an early warning sign that the business is spending more than it should, and it’s time to take action.
How to work out your ‘death date’ (cash runway)?
The most common way to work out your ‘death date’ is by using your burn rate. The amount your business is spending (or burning) each month. You should first work out your gross burn rate, which is the total amount you spend each month on fixed expenses like rent and utilities, plus the total sum of variable expenses such as salaries, supplies, travel and so on.
Then, look at what cash is coming into the business every month – and that means actual cash received, rather than invoices sent. Finally, subtract your gross burn rate from the total cash received to get your net burn rate, commonly just referred to as ‘burn rate’.
To work out your ‘death date’, you simply divide your cash balance by your burn rate. So going back to that original example, if you have £100,000 total cash, and spend £10,000 every month, then your cash runway is £100,000/10,000 = 10 months. In this instance, your ‘death date’ is within 10 months of normal operations before you run out of money.
Don’t do this…
1. Don’t just work out a rough date by checking your bank balance. You won’t get the full visibility and clarity to have an accurate date. You might end up with a more optimistic date and do nothing, when you should be taking action. Alternatively, a false alarm could cause you unnecessary anxiety.
2. Don’t try to resurrect a dusty, error-prone spreadsheet to work out your death date. It gets complicated quickly and can break easily. Additionally, it’s impossible to model potential scenarios ahead of time that let you see the direct impact of your business decisions.
Do this instead…
Having software, like Float, that syncs with your accounting software like #xero #quickbooks or #freeagent will take away much of the manual data entry work, reduce errors and give you more accurate and up-to-date information. Float acts as an early warning system to allow you to see the bottom line approaching. In this way you can take action early, making informed and confident business decisions, so you always know where your business is.
Remember, you can avoid your ‘death date’!
Never leave it until it’s too late for your business! You can sign up and connect your accounting software #xero #quickbooks or #freeagent in minutes and quickly see where your business is at. Float is designed for business owners without a financial background, so it’s straightforward and not intimidating. We have a team of experts on standby (during set up and beyond), to help with any questions, so your forecast is as accurate as it can be. This way, you have peace of mind knowing that your future decisions are based on reliable data.