Cash Runway: What Is It and How to Extend It

We're all familiar with the importance of a runway for a pilot, but what about for a startup? Just as airplane runways are crucial for pilots landing planes, cash runways are equally important to startups landing their longevity and success.

In this blog, we’ll dive into the fundamentals of cash runway, explaining what it is, why it’s crucial, and how to leverage it to drive growth and sustainability. From calculating your runway to overcoming common challenges, we’ll share strategies for extension and optimization for long term success. 

Introduction to Cash Runway

What is Cash Runway?

Cash runway is the amount of time (i.e., the 'runway') a company can continue operating before using up all its cash on-hand (i.e., the 'cash'). Cash runway can be determined using a simple formula, aptly called the cash runway formula (or the cash runway calculation):

Cash Runway = Cash on Hand (the amount of cash available to the business) / Cash Burn Rate (the speed at which the business spends cash)

Calculating your cash runway is important from a practical standpoint. Companies need to know how long they have before they run out of cash to ensure the overall financial health of their business. Conversely, a healthy runway allows a business to spend strategically where it matters most. 

Why Is Cash Runway Important?

Companies face higher-than-ever upfront costs and longer ramp-up periods with extended time between development and eventual revenue generation. And if you want to remain competitive, chances are your burn rate will run high. Companies must spend significantly to fund innovation, customer acquisition, and market penetration. 

Spending too much, too quickly can deplete cash reserves and lead to negative cash balances. Instead, keeping track of your cash runway and extending it when possible can provide more longevity and better strategic decision-making. 

A holistic view of cash runway is one of the most important metrics in determining the financial health and viability for the future of a business. The most successful and agile businesses regularly track and measure their net cash via runway calculations.

Core Strategies for Optimizing Cash Runway

Typical Cash Runway Management Challenges

Businesses often face the same challenges when it comes to cash runway. Some of the most common include:

• Accurate Cash Flow Forecast: Accurate cash flow and cash flow forecasts can prove challenging for newer businesses, as revenue, monthly operating expenses, and/or total cash reserve figures may be miscalculated. Additional unexpected expenditures can contribute to cash forecast accuracy.
• Balancing Growth & Spending: There’s a delicate balance between spending to fuel rapid growth while sustaining cash reserves. Striking the perfect balance requires choosing the right financial strategies and investing in the right areas at the right time.
• Lack of Contingency Plans: When your cash burn rate doesn’t go according to your forecast, are you able to adapt? Many startup founders lack a sufficient contingency plan to overcome the toll the burn rate takes on their budget and financial plans. 

These common challenges can hinder a business's ability to manage its cash runway, and ultimately impact its cash position and long-term success. To avoid these pitfalls, we've curated some key strategies to optimize cash runway.

How to Optimize Cash Runway: Key Strategies

Optimizing cash runway involves careful management of cash inflows and cash outflows. This extension allows your company to invest in key internal initiatives, be better prepared for unexpected expenditures, and avoid unneeded additional funding with poor terms. Here are our recommended best practices: 

• Controlling Costs and Reducing Operating Expenses: First and foremost, you’ll need  to control costs and reduce your monthly operating expenses. This can be achieved through increasing operational efficiencies, reducing discretionary spending, and reviewing and renegotiating contract terms with third parties and vendors.

• Uncovering New Revenue Streams: As cash runway is the result of both inflows and outflows, focusing efforts on establishing new inflows can slow down burn. Expanding into new customer segments, upselling and cross-selling to current customers, or increasing the margin on current offerings via price adjustments can all help extend your runway.

• Improving Cash Flow Timing: Ensuring cash flows in and out of the business at the right times to support business operations is another key way to optimize cash runway. Early payment discounts, client payment terms aligned with your preferred schedule, and targeted spending periods (such as during revenue cycles, when the business is earning the most) help improve cash flow timing.

• Setting Prioritized (and Scalable) Budgets: Companies should set budgets that are focused on essential spending but can be scaled when appropriate based on revenue. As spending occurs in real-time and is constantly evolving, budgets should be reviewed and updated periodically based on current cash flow, future cash updates, and growth goals. This in turn helps preserve a company's current cash balance and total cash reserve.

Financing Options to Extend Cash Runway

Basic cash flow management strategies only go so far. Exploring additional financing options can open more doors and support companies in sustaining, and even accelerating, growth. 

Leveraging financing to support your cash runway can be helpful at pivotal moments: 

• Longer periods without revenue that spur from heavy focus on R&D, long sales cycles, or seasonality 
• Market changes that require pivoting and reassessing current investment areas 
• Need for quick cash injection for things like a big ticket tech purchase or adding more seats as you scale

Alternative Financing

The demand for alternatives to traditional financing mechanisms has increased as companies look for new ways to accelerate growth. Alternative financing methods (such as embedded financing, revenue-based financing, and invoice factoring) give businesses, old and new, unprecedented access to financing without the same restrictions or challenges that come with institutional lenders.

Alternative financing works as an additional tool to extend your cash runway in a variety of ways: 

• Improving timing: Alternative financing solutions provide more flexibility in choosing when you pay back the investment. You can choose a payment plan that aligns with your financial strategy and cash runway. 
• Controlling costs: Your alternative financing partner can support you in paying for costs upfront, giving you more leverage in negotiations and access to discounted prices. 
• Standardizing burn: With regular, consistent payments, you can spread out expenses, and better calculate your runway, all while spending in ways that spur growth. 

With Gynger, you can use alternative financing for your technology purchases. When purchasing software, hardware, or cloud infrastructure technology, we pay your vendor up front, and you pay us back with terms you choose. 

This new, more flexible and customer-centric model of securing financing is revolutionizing how businesses access and utilize funding and ultimately changing how they approach their cash runway.

Cash Runway Management for Long-Term Success 

Cash runway is a fundamental marker of a company's financial health. A key success metric of any successful business is a baseline knowledge of cash runway calculations and their impact on cash reserves and cash flow forecast. 

By utilizing the above strategies, you can optimize your cash runway to be more agile in how you spend and where you put your investment. With the rise of alternative financing solutions like Gynger, you can extend your cash runway with flexibility and ease.