How to Build a Runway: Cash Runway for Small Businesses in 5 Steps

"Cash runway" is vital for small businesses. Find out how to calculate and extend yours for business stability and growth.

By Guidant
Updated June 28, 2024

As a small business owner, whether you’re just starting out or steering a seasoned venture, understanding your “cash runway” is crucial. You might have heard buzzwords like “scale up” or “game changer,” but “cash runway” is the sleeper term you can’t afford to overlook. Essentially, it’s the lifeline of your business — the number of months you can keep operating before your cash reserves dry up. Running out of cash isn’t just a hiccup; it can spell the end of your business journey.

That’s why building and managing your cash runway isn’t just a task — it’s a central pillar of your business’s survival and growth. It influences everything from day-to-day operations to long-term strategic planning, financing, and beyond.

Additionally, as the economic landscape continues to shift dramatically in the U.S., mastering your cash runway becomes even more essential. Economic downturns and potential recessions can turn business operations upside down. By securing an adequate cash runway, you can navigate through these uncertain times and keep your business afloat.

Let’s explore five critical steps for building and fortifying a cash runway.

5 Steps to Building a Cash Runway

Step 1: Calculate Your Startup Cash Runway

To calculate a startup runway, you need to know two things: 1) your current cash balance and 2) your burn rate. Your cash balance consists of the company’s liquid assets at the start of a given period. Your burn rate is how quickly you are running through cash by month.

In other words, if you start the year with $500,000 in the bank (your cash balance) and at the end have $300,000, your company burned through $200,000 that year. If you divide the $200,000 by the number of months in a year, you’ll find your cash burn rate is $16,667 per month ($200,000 ÷ 12 = $16,667). That’s the amount you lost in a month, on average.

Then, to find the startup runway, you perform the following calculation:

Current cash balance ÷ burn rate = Startup runway

In other words, if you have $300,000 in cash and your burn rate averages $16,667 per month, your startup runway is currently 17 months ($300,000 ÷ $16,667 = 17). That’s the point at which your business will run out of money.

When building your business models, it is advisable to plan for a runway period of at least 12-18 months.

Step 2: Examine Costs and Cut or Reduce Unnecessary Expenses

The next step in building your runway is to examine your business’s costs to reduce unnecessary expenses. The more you reduce costs, the more you lengthen the runway.

There are multiple methods to cut costs, including:

Reducing staff
Eliminating big-budget annual payments (such as bonuses)
Postponing or reducing capital expenditures, streamlining operating expenses
Finding more affordable office space
Exploring whether your raw materials can be obtained more cheaply
Negotiating contract terms with suppliers

Keep an eye on operating expenses always to make sure that they are reasonable and not outside of normal business operations.

Step 3: Increase Revenue by Upping Your Marketing and Sales Strategy

Once you’ve reviewed your costs, the third step is to explore how to increase your revenues, by upping your marketing and sales strategy game.

Here, too, there are multiple methods to explore, depending on your business sector and client base. Ask yourself the following:

Can you grow your market share?
Can you introduce a more expensive product or price your existing products more aggressively?
Can you cross-sell or upsell to a different or adjacent client base?
Can you increase the reach of your marketing to a different sector of clients?
Can you open new outlets for your products to increase sales?

Keep an eye on your positive cash flow and balance sheet on at least a monthly basis to effectively monitor revenues and costs. A decline in revenue can shorten your runway. In some sectors, a weekly basis is a good idea.

Step 4: Plan for Potential Disasters and Build Your Cash Reserves

In Step four, you need to build your cash reserves to plan for potential disasters. Unfortunately, businesses can face uncertain times during their lifespan. Scenario planning can help you meet those challenges.

Some are economic, such as recessions. But the danger doesn’t end there. Supply chain delays, for example, can result in product delays, which can cause sales and revenue to go downhill. Businesses in the construction and related sectors have been very negatively impacted over the last several years by supply chain issues. The COVID-19 pandemic and its lockdowns affected many physical consumer-facing businesses, such as restaurants and airlines. Even changes in consumer tastes, such as a switch to cupcakes from yogurt, can exert a negative impact.

Think through potential scenarios that could spell bad news for your company and sector.

Then, gradually build up your cash reserves by keeping a tight rein on costs and maximizing sales and revenue. The more liquidity you have, the longer your runway will be.

Step 5: Seek Reputable Business Financing Partners and Solutions

Your runway affects everything from viability to the ability to diversify. It also affects your ability to secure financing. If you want a business loan, for example, lenders are likely to look at all aspects of your ability to pay back a loan. If they see a runway of just six months, they will very likely see you as too risky a prospect. Similarly, equity partners may not be willing to invest in a small business whose runway indicates a potential lack of viability for their investment.

That’s why seeking strong financing partners and solutions with solid reputations is important. If you already have a good reputation with a local bank or credit union, do everything you can to strengthen it. Carry your accounts with them and talk to them about your business. If you’re a prospective business owner, know that a local lender willing to be a partner can be very valuable.

Increase your knowledge of funding solutions as well. Entrepreneurs often need funding to expand or capitalize on business opportunities. While loans and equity offerings are standard funding methods, there are many alternatives. Rollovers for Business Startups (ROBS), for example, can utilize your 401(k) or other qualified retirement accounts to fund the business without fees or penalties — and without the monthly debt payments that come with loans. The more funding solutions you have, the better.

How Guidant Financial Can Help Your Business

At Guidant Financial, we’re here to empower small business owners and aspiring entrepreneurs with expert guidance and innovative solutions. Whether you’re looking to boost your revenue, minimize costs, or secure the best funding options, our team is ready to help you chart a path to success. Explore unique funding strategies, including ROBS (Rollover for Business Startups), and learn how they can be effectively combined with U.S. Small Business Administration loans and other financing options. Don’t wait to expand your horizons — contact our team today and take the first step toward growing your business.

Call us today at 425-289-3200 for a free, no-pressure business consultation to get started — or pre-qualify in minutes for business financing now!

“Guidant is our one-stop shop for us to do it all. And I will say that one of the characteristics of Guidant that I really appreciate is the commitment to service and getting it right.”

— Tom Gonzalez, Woof Academy

Read the stories of REAL small business owners who work with Guidant.

Want to Use ROBS to Start a Business?

Our step-by-step Guide to Rollovers for Business Startups is a complete handbook of everything you need to know about using ROBS to start or buy a small business or franchise.