How Much Cash Runway Do SaaS Companies Need?

November 3, 2022

Picture a plane on the world’s longest runway (that would be Qamdo Bamba airport in China, at 16,404 feet, for all you trivia fans out there). So the pilot has a fair bit of room to work with before taking off. Now contrast that with the Juancho E. Yrausquin Airport in the Caribbean. Its runway? Well, there’s technically 1,300 feet of asphalt, but apparently, only 900 feet are usable, making it the shortest commercial runway worldwide. Talk about little room for error!

What is Cash Runway?

SaaS companies, just like commercial pilots, have runway. But theirs is measured in months. Here’s a handy formula for measuring cash runway:

($) Cash Balance/($) Monthly Burn Rate = (months) Cash Runway

If you have $1,000,000 in the bank and are burning $100,000 each month, you have 10 months of cash runway.

Why Cash Runway is Especially Important Now?

Cash runway is always essential. Sadly, companies go out of business simply because they run out of cash to pay their bills. So the moment you can’t meet payroll or pay to keep the lights on is a sign that the end is at hand.

But we would argue that having sufficient cash runway is particularly important. With fears of a recession rising and traditional venture capital financing drying up, many SaaS companies are faced with two big problems at once: First, there’s the prospect that revenue growth could stagnate or go negative (bad for cash flow), and second, VCs may not be there to extend the runway as they were in the boom times.

How Much Runway Do Companies Normally Give Themselves?

-There’s no one size fits all answer to the question, “What’s a normal amount of cash runway?” It really depends:

-Profitable companies, for example, should always have at least three months of cash (expenses) in the bank. That may seem high but think of what happened to airlines in Europe when an Icelandic volcano exploded: Planes were grounded, revenue dried up for a while, and if an airline didn’t have cash on hand to meet its immediate obligations, they were finished.

-Companies that aren’t quite profitable, but will be shortly, should have a longer runway at six months. Six months is likely enough cushion to make expenditure adjustments if necessary.

Businesses with a very high burn rate (say 100% of income) need a much bigger runway, given how quickly they are depleting their cash. For these companies, 12-18 months is a better target. “Right-sizing” to break even will take time, and it’s best to be conservative (i.e., more time is better). On the other hand, cutting back may be painful if a company has super-high growth. But a leaner company is always preferable to one that didn’t make it.

Just Because You Have Cash Doesn’t Mean You Need to Spend it Now

It may seem counterintuitive, but cash-rich companies are laying people off and cutting other expenses, given a looming recession. The reason? If they don’t believe certain positions are adding value right now, it may make better sense to keep their powder dry and wait for the economic storm clouds to clear. Companies that can maintain a significant cash pile when we exit the forecasted recession will be in great shape: They can hire the people to take their growth to the next level. Plus, they may get more bang for their buck when spending to acquire new customers. A business might have to spend $4 to earn $1 of new revenue, but these numbers could very well flip in better economic times.

What to Do if You Need to Extend Your Runway

If you’re running a SaaS company and are looking nervously at your cash balance, it’s probably time to extend your runway. Here’s what you can do:

● Seek out debt to shore up the balance sheet

● Cut expenses where possible. For every expenditure, ask yourself, “Do we need this, or do we simply want this?” Now is a time for cutting the wants to focus on the needs.

● If you decide to test the waters for an equity raise, give yourself as much time as possible. Raises typically take 6-9 months in a good market, and it’s safe to assume it might take longer now.

For more tips on extending your runway, check out John Gallagher’s blog post here.

Eyeing your cash runway and thinking it might be a good idea to have more cash on hand? At Element Finance, we offer easy-to-understand term loans to SaaS companies just like yours. No hidden covenants, no board seats requested, and no equity warrants either. So give us a shout anytime, we’re always happy to chat.

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