Cash Runway
Video
Helps You Identify If
- Your Client Collections Policies Are Effective
- Your Supplier Payments Policies Are Effective
- Your Inventory Levels And Policies Are Effective
- Your Average Monthly Expenditures Are Changing
Liquidity is a means of understanding a company’s susceptibility to either current of future financial distress. It also helps build a risk profile of the business. But remember though that a single “safe” liquidity measure does not exist across all industries. Likewise, some industries traditionally and successfully trade at low liquidity levels, whereas for others, the same figure is a sign of distress. One indicator of liquidity is understanding your the amount of cash that your company has as its disposal should all revenue sources dry up. But what is my cash runway?
How do you get your runway? Your runway is the amount of cash at hand compared to your average monthly gross burn rate. The measure shows the number of months (or part months) cash available to your business before you go cash negative.
Suppose that all sales stopped within your business tomorrow. How long could your business remain solvent? This measure, tells you, in the number of months, how many months your business could survive or remain solvent should all your income streams dry up – such as in a Covid lockdown, or other catastrophic event.
Check your cash runway with Jazoodle now.
Definition used:
Your company’s cash runway is calculated by the following:
Total cash at hand or in bank
Divided by
Average monthly gross cash burn rate
Your runway can be improved by a number of measures or changes, including:
- Increase sales revenues
- Reduce the time you take to collect your client invoices
- Increase the time you take to pay your suppliers
- Reduce your short term liabilities and expenses