As the saying goes, "no runway is too short if you don't want to fly." But in the corporate world, a short financial runway can spell disaster.
Chief Financial Officers (CFOs), more than anyone else in the company, are the main gear responsible for management and survival in such scenarios.
But sometimes, resources are scarce, and the runway seems like a sticky overflowing cup.
The operational challenges could become overwhelming, leading to shortfalls that hamper even the most well-thought-out plans and strategies.
In this article, we explore critical strategies that CFOs need to navigate and manage short-runway situations effectively, especially during this challenging time in 2024.
Startup runway indicates how long a business can stay operational before running out of money.
This figure is not merely a reminder to keep entrepreneurs alert; it is a fundamental instrument for budgeting, planning, forecasting, and fundraising for the entire life of the business.
It shows how quickly money is spent when financing needs to be raised, and if the business model needs to be adjusted.
Start-up runway can be determined whether revenue is yet to be made or is already in the millions.
Investors — from venture capital firms to angel investors — want to know the length of the runway.
The runway is calculated by dividing the company's current cash balance by the monthly burn rate - the amount being spent each month to keep the business up and running.
The formula is quite simple: Runway = Current cash / Monthly burn rate
The resulting figure shows how many months the business can survive without additional funding.
It's essential for company CFOs to stimulate various scenarios by adjusting the monthly burn rate and cash balance, affectionately known as "stress testing" the calculations.
If the calculated runway is too short, it's a glaring red signal that there's a need for immediate capital replenishment or expenditure-mending actions.
Key things to note here:
- Runway doesn't kick the can down the road: Runway is a means of keeping the company afloat. It is not a method stalling the problem of running out of funds, but a process to find solutions soon enough before the threat becomes unmanageable.
- Keep it realistic: While calculating the runway, the influx of revenue should not be overstated, and expenditure understated. This only leads to a distorted reality of happy days that inevitably leads to a rude awakening.
- Keep emotion out of finances: Emotional aspects might lead the CFOs to overestimate the revenue, underestimate expenses, or both.
- Rigorously monitor your cash flow: Constant vigilance on the inflow and outflow of cash helps a CFO diagnose where exactly the company stands financially.
- Predict, prepare, and proactively act: Use the runway calculation to predict potential problems, prepare contingency plans, and act on them sooner rather than later.
Amid economic constraints, technologically integrating finance functions becomes necessary. Given below are a few strategies that the C-suite professionals can incorporate.
Also referred to as the Pareto Principle, the 80/20 rule indicates that 80% of results generally come from 20% of efforts.
A CFO can use this rule to identify the company's most beneficial financial components or strategies.
These identified elements should hence be given more attention and resources to maximize efficiency.
Automation, particularly in the financial sector, reduces redundancy, increases efficiency, and facilitates scalability.
Instead of wasting valuable time and resources on repetitive tasks, CFOs can implement automated software such as accounting systems, cash flow, and financial reporting software.
These hacks provide precise results, diminish human error, and free up a sizable amount of time for human intellect engagement.
Regardless of how well a company may be doing, there's always room for improvement when it comes to spending.
A short financial runway necessitates rigorous budget trimming wherever possible.
This could mean cutting down on non-essential luxuries, acquiring more cost-efficient business solutions, or negotiating better deals with suppliers and vendors.
Adhering to a lean financial strategy implies optimizing resources and cutting any form of waste. It includes processes, people, and systems, such as unnecessary personnel, underutilized equipment, over-expensive tooling, inefficient procedures, and slow reactions to market changes. The practice focuses on delivering maximum value for customers with the lowest possible expenditure.
They say, “Revenue cures all entrepreneurial mistakes.” A formidable way to navigate a short runway is to continually revisit and bolster the enterprise's overall revenue model while considering sustainability and profitability.
Funding is often needed to continue operations while a start-up scales.
CFOs have to ensure everything is in place well in advance to pass the scrutiny of potential investors, from having updated financial statements, and realistic growth projections, to a defendable valuation of the company.
Here, warm relationships with potential investors matter as much as the notion of the business. Preparation is key.
2023 was not a typical year for businesses, and 2024 could also throw up unexpected challenges.
Markets can sometimes shift in unpredictable ways. This can cause major disruption to industry trends and economic stability.
It's therefore crucial for CFOs to consistently watch for market fluctuations that might need business model alterations.
This also means understanding both the short-term and long-term implications these trends play into financial planning and runway calculations.
Critically assess all pricing schemes, product bundles, customer incentives, and service offerings in light of present customer behavior, competitor moves, and market realities.
SaaS, or Software as a Service, business models are increasingly consuming favor for their inherent adaptability and scalability.
If it is not already part of your business operations, it may be an opportune time to explore.
Subscription-based pricing, high clarity of costs, cloud computing flexibility, and real-time metered usage have made SaaS a viable alternative to traditional software models.
Increasing customer retention is one critical function of CFOs. Satisfied existing customers equate to more stable revenue, decreased customer acquisition costs, and often contribute to improved profitability. Create a focus on enhancing customer service and satisfaction, explore loyalty program schemes, and continually revisit and refine product offerings.
While a short financial runway may induce a modicum of panic, it's important not to let such a mindset percolate through the organization. Maintain positive notions of expansion and prosperity, backing all decisions with strategic thought or tactical intention, presenting not just as hope but as concrete planned-out futures.
Mitigating the burn rate isn’t isolated to the financial department; it typically involves working in stride with the operation, HR, and other teams. Each member across all levels of the organization can play a part, suggesting cost-saving insights or efficiency-boosting steps. Ask questions like:
- Are all our operational processes streamlined?
- Can we adopt new technology to improve productivity?
- How effective is our communication within the company?
Everyone's ideas construct the broader success of your financial strategy.
Software like Fincent, QuickBooks, Xero, and Netsuite are tools of immense value in organizing, tracking, and strategizing financials.
Digital transformation, from data handling to decision-making, is an inevitable step for the traditional approach towards money management.
There’s nothing more demoralizing to the team than seeing off their colleagues. Especially during perceived financial strain.
Instead of laying off your team members, a temporary pay cut strategy could be shared, supported by transparent communication and an understanding towards restoring salaries when the incalescent financial state stabilizes. This may foster trust and loyalty in the workforce while aiding in financial preservation in the short term.
Tips to navigate this:
- Issue equity shares in proportion to salary reductions.
- Maintain transparency about the business's financial status.
- Ensure all team members understand the context and reason for the pay cut.
- Regularly update the team on the progress toward financial stabilization.
- Be prepared to answer tough questions with honesty and empathy.
Think of your business plan as a living document that can morph as your startup does. Few business plans survive contact with the real world without needing some significant change. When the assumptions underpinning your plan change - be it due to new market research, changes in the competitive landscape, regulatory requirements, technological advances, etc. - be ready to adapt and revise your course.
- Start with a critical analysis of your original vision in the context of the current climate.
- Use insights from regular forecasting, competitive analysis, and new discoveries as a chance to revisit and update the approach.
- Remember to validate new directions with actual industry data.
- Involving employees in the revising process could lead to the creation of more robust and viable plans.
There is no definitive answer to this, as it can significantly vary from one company to another.
The amount of runway required largely depends on the business model, growth projections, and similar factors.
However, as a basic rule of thumb, it's often recommended that startups have at least 12-18 months' worth of operating expenses stashed in reserves as a “runway.”
Given below are a few key considerations.
Faster-paced startups might require more runway to sustain their operational activities before turning profitable. Ensure scenes of high growth match up with equally robust financial support.
Turbulent markets infused with a level of unpredictability carry a higher risk; hence, such businesses should aim for a longer runway to receive adequate cushioning. It allows room to navigate unforeseen hurdles or panning market scenarios while maintaining the company's momentum.
If you foresee imminent rounds of fundraising, be equipped with an appealing runway length. Prospective investors often prefer a company that can survive at least 12 months on current funds, extending reassurance about operational stability.
Established vs startup company
While established businesses may have saved up in profits over the years or have better access to various financing tools, it's usually a contrary case for startups.
Startups often operate in limited financial means with a significant likelihood of unforeseen obstacles impacting cash flows. Due to these reasons, it becomes vital for startups to secure a longer runway.
For businesses that show seasonal variations in sales and cash flows, a longer runway will manage the lean business seasons effectively—such as retail that peaks during holidays or tourism-based businesses inversely affected by seasonal changes.
Companies in sectors like biotech, AI, etc., with strong R&D reliance, usually need more time on research. More runway is needed in these sectors due to the pivotal nature of research failures/successes, which can significantly affect the business's prospects. For example, a biotech firm may need multiple years of financial stability to see a potential drug move from the R&D phase to the clinical trials phase.
These years could include a lot of hits and misses, needing ample stabilizing reserves to facilitate potential windfalls.
However, for businesses in a non-R&D intense sector or businesses with a predictable service model, a shorter decompressed runway might suffice. For instance, a service-based startup providing clearly defined deliverables might have a steady stream of revenues covering their fixed and operating costs and might need a lesser runway covering mostly unforeseen business expenditures.
A healthy cash runway reflects slow, steady spending, counterbalanced by predictable revenue increase and supported by accessible backup reserves to absorb operational deficiencies or uncertainties including unexpected opportunities.
A healthy cash runway needs to be flexible enough to adapt to the intensity and requirements of business operations at different stages – be it exploring a big business opportunity or sustaining difficult financial drains and downturns.
But the hint of a financial crisis isn't where building a decent runway begins.
Rather, it necessitates a consistent investment of discipline, planning, priorities, strong decision-making abilities, judgment calls, smart budgeting, and most important, instant access and usage control over constant cash flows.
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