For every business, cash runway ought to be a key metric in surviving the COVID-19 crisis. But how is a vital metric for start-ups and venture capital funding relevant at a time like this? Shouldn’t we focus on keeping existing companies going?
We’re in a global, grand-scale experiment in socialism. The health threat of COVID-19 is important, but this is just the presenting symptom.
Of course, the medical issue is important, especially to each patient infected. By far the bigger threat to us all, though, is the inexorable economic catastrophe.
This is, literally, an existential crisis for the biggest constituency in almost every country’s economy: small business and labour. Directly in the gunsights is the livelihood of entrepreneurs and their employees.
If that’s you, here’s why cash runway must be on your exec dashboard:
First, what is “cash runway”?
The simplest definition is: cash runway indicates how long a new business will survive on its starting capital (or a re-investment) before its cash runs out.
The basic formula is:
cash runway = cash available ÷ monthly burn rate
It’s measured in months, hence using monthly burn rate. “The burn rate is . . . the rate at which a new company is spending its venture capital to finance overhead before generating positive cash flow from operations.” (Investopedia, 2019)
For example, a cash runway of 8 means the business needs to become self-sufficient within 8 months. When monthly cash flow is positive, cash runway itself loses relevance, but the principles extend into sustainability and shareholder value. (We explain this in our Ownership Wealth and Freedom course for our members.)
Except, you’re not reading this because you’re worried about positive cash flow, right? Like most business owners, you’re probably worried about the life-threatening and sudden shock of a negative cash flow scenario. As well you should be!
So, just like a start-up, now is a good time to hit the financial planning reset button. Whatever cash reserves you have available, plan as if you’re in start-up mode.
You have two priorities:
1. How can you slow down the burn rate to stretch out your cash runway?
2. How can you grow revenue quickly enough before running out of runway?
Why? Because I hope you’re not thinking that lockdown itself is the bad news. Nor is the bad news that lockdown restrictions will be lifted gradually in phases.
The “proper” bad news is that it’s going to take months, maybe years, before most companies will get back to a positive monthly cash flow situation.
This crisis is not happening far in the future. It’s happening now. Act now.