Why Knowing your Cash Runway is a Killer Tool

May 15, 2014

Your runway is the number of days before your company bank account reaches zero, based on planned expenses and income:

What is your runway?

While doing Skype onboarding sessions with new users on WiseCash, I noticed that:

  • There is often a gap between the actual runway and the perceived runway (due to lack of cash flow forecasting, or out-of-date forecasting).
  • This gap usually affects their decision-making process a lot.

Concrete example of a widespread situation: a freelancer is afraid of turning down a contract or increasing his rates. But he actually has more runway than he believes, which means he would have plenty of room to negotiate or say no!

Actual runway versus perceived runway

The infographic below represents the 4 possible situations when it comes to actual vs. perceived runway:

Actual Runway vs. Perceived Runway

“Crash Ahead”: you believe you have a good runway, but your perception is incorrect. For instance, you may underestimate upcoming taxes or risk a late payment or illness, and not handle it. Your company is fragile - you should monitor your actual runway closely, as soon as possible.

“The Rat Race”: you are lucid about your current situation, but a single unexpected event can be enough to cause you issues. You do not have a lot of freedom of choice in terms of projects/pace/rates. The situation may be stressful and tiring. Follow your runway closely and work at increasing it: reconsider how you bill, ask to be paid upfront or earlier, lower your expenses, and try to increase your rates a bit.

“Missed opportunities”: you have a lot of freedom of choice, but do not know it. As a consequence, you take on too much work and your rate is too low. You are leaving money on the table (which would help for: retirement, house, tuition etc). Make sure to compute your runway before your next negotiation and you will see that you can ask for more without fear of downtime. Also: holidays!

“Power Zone”: your situation is good. In addition, you know it is good, which gives you a lot of freedom: ability to say no to clients, to increase your rates, to be very selective about the projects you work on or to set your pace. Congratulations! Make sure you remain up there :-)

I hope you do now realize that knowing/monitoring your cash runway is important, not because of money, but for the freedom of choice it brings to you.

Thibaut Barrère (WiseCash founder)

@thibaut_barrere

thibaut@wisecashhq.com

Thanks for sharing this article around!


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