Guarding Your Runway

You hear it everyday: cash is king. In most cases, they’re referring to customers using cash to pay for products or services instead of credit cards, due to the fees associated with that service. However, when it comes to your business, the amount of cash you have on hand at any time (known as your runway) is what ultimately rules your business. It determines how many staff members you can afford to pay at the end of each pay period, how much inventory you can purchase, or how many software subscriptions your service-based business can keep. It even determines whether or not you can pay yourself. Having up-to-date books is a critical part of running a business, even though it’s probably the least glamorous task you have as a business owner.

Determining the amount of money coming in and going out is, in my opinion, one of the most important parts of developing your Business Model Canvas, just behind your Value Proposition statement and determining your customer segments. It determines whether or not you have a potentially scalable business or just a fun hobby that brings in a bit of money each month. Cash flow is broken into two boxes – what’s coming in and what’s going out. Your Revenue Streams (what’s coming in) and your Cost Structure (what’s going out) are both primarily your responsibility, maximizing the former and minimizing the latter.

Let’s focus on Cost Structure first. Even with the price of everything seemingly rising without end, there are things you can do proactively before you reach the point where you have to let employees go. Make sure your expenditures are separated into two categories: discretionary and non-discretionary. Non-discretionary costs include things like payroll, rent, debt service, and insurance – things you have to pay out each month regardless of income. The discretionary expenditures are everything else, from how much inventory you purchase, to how much you spend on new replacement equipment and subscriptions, to the snacks in the break room. Your income from the business as the owner should also fall under discretionary spending.

Once you’ve separated everything into the two categories, you should have a number that will serve as your minimum income requirement. This is the amount of money your business must make each month in order to stay running and not dip into reserves. As a business owner, you need to know this number by heart. If you’re ever having trouble meeting this number, it’s time to start making difficult decisions. Discretionary items are the first to examine, followed by staffing levels. What subscriptions does your business have? The larger the business, the more likely there are duplicate software tools and licenses going unused. Do you have physical goods or equipment you don’t need? If you look hard enough, there might be one or two pieces of equipment used so sparingly that renting them on occasion would make significantly more sense.

Depending on your business, you could be working with one or more vendors who supply you with the tools and inventory you need to run things. Vendors do everything in their power to prevent churn on their end, so consider renegotiating contracts, especially if you have been a long-term customer. Some vendors will knock 15-20% off the price of a subscription for a year if you are able to pay in full up front. Other vendors may be temporarily flexible with payment terms, possibly accepting net-60 or net-90 terms, depending on the size of the contract. You might actually be able to consolidate vendors if you find duplication in your supply chain.

Look around at the space in which your business functions. Do you have extra space that you could sub-lease to a startup? Office and warehouse space can be expensive or difficult to find in small quantities for small teams or manufacturers, so you possibly could have a valuable asset to someone just starting out. Double points if you can find a startup that could fit into your supply chain once they are up and running. Also, if you have equipment that you infrequently use, you might be able to generate income renting time on the equipment to a startup that cannot afford to purchase that equipment outright. Working with startups and small businesses who don’t directly compete with you is both a financial win and a win for your local entrepreneurial ecosystem.

Finally, as you classify non-discretionary versus discretionary spending, prioritize your discretionary list to determine if there are any programs or initiatives that you could immediately shut down or cancel. If your business has multiple locations, you should have the performance metrics for each location – determine which location is the lowest performer or biggest drain on the bottom line and shut it down as soon as possible if financially prudent. If you were trying to expand into an adjacent market and it’s just not panning out as quickly as you thought it would, now is the time to wind it down.

You also have some wiggle room on Revenue Streams. If you haven’t calculated your cost of goods sold and your margin within the last year, you should quickly run those calculations. Inflation is never-ending, and you need to be able to adjust to ever-increasing prices of your raw materials and ingredients. Depending on your industry, if your margin has slipped below the lower threshold for profitability, it might be time to raise prices or reconfigure contracts with suppliers to lower or stabilize your costs. If your competition has raised prices by a certain percentage, it’s perfectly fine to put your business in line with the others.

Another way to adjust your Revenue Streams is to increase the number of streams you have. Tiered pricing, especially for subscription-based business models, is very popular right now – your customers can buy the amount of whatever you sell that they need, and the excess capacity can be sold elsewhere. If you only have two or three tiers, potentially adding a new tier on the bottom end could bring in more cost-conscious consumers. An addition on the top end could be marketed as a luxury option, especially if your brand is seen as upwardly-mobile. Inversely, if there are tiers that have very few customers, consolidating those customers into adjacent tiers could simplify your product offerings.

Pricing when you have little direct competition is a bit like throwing things at the wall and seeing what sticks. If your churn rate is low under your current pricing structure, now might be the time to slightly raise prices. Don’t go too quickly, or your churn will skyrocket, especially if your business is a “want” rather than a “need” in the minds of your customers. You can also sample some of your customers with a quick survey if you’re having a difficult time adjusting your revenue model. Reward those who take the survey with a gift card or a free upgrade on an item in your store.

Overall, you should have two quarters of reserves on hand as runway. Black swan events are always around the corner, and those who prepare in advance can survive events like the pandemic in 2020. If your bank offers an interest-bearing account where you can stash reserve funds and withdraw them quickly if needed, take advantage of this opportunity. Even a few cents of interest here and there begins to build up and can help increase your war chest if the stuff hits the fan. Consider also building a 13 or 26-week cash flow forecast – planning out one or two quarters will help show you the true amount that you need to keep on hand in case of emergency.

Your runway is your most important “vital sign” as a business owner. The more runway you have, the less you need to worry about an eventual downturn in the economy. Also, having a plan in case of emergency or economic downturn is the best way to prevent disaster. Get working on your plan and your forecasting now!