Every startup manager knows that without cash, a company cannot survive. The cash runway indicator is used precisely to monitor the rate at which the company's funds are being consumed. Here's how to set up this SaaS KPI for startups, which is essential for steering a business with recurring revenues. Find out why it's essential, especially in the current economic climate, and how to extend it.
1 - What is a startup’s cash runway?
1.1 - Cash runway: definition
Cash runway measures the time a business has before running out of cash. It is generally expressed in months. This indicator is therefore based on the current cash balance, monthly expenses, and sales. If a SaaS startup is still developing its product, then the cash runway is entirely made up of cash outflows, i.e. expenses, since the startup does not yet have customer revenue.
1.2 - Calculating cash runway: formula and practical example
The cash runway is therefore calculated by dividing the available cash balance by the average current expenditure net of income.
To illustrate the SaaS cash flow trail, let's take a practical example. Here's a company's data for the last three months:
Average recurring expenditure is (32400/3)=10800 euros.
Current recurring revenue, excluding grants and fundraising, amounts to (622940 - 500000 -120000)/3 = 980 euros.
Average net expenses (or net cash burn) are therefore 10800 - 980 = 9820 euros per month.
With this data, you can then calculate the cash runway:
1.3 – Why SaaS analyze cash runway and burn rate together
As you can see, the two indicators—cash runway and burn rate—are closely linked. It's essential to first calculate the net burn rate, i.e. average sales-related expenses net of revenue. The cash runway is then calculated from this net burn rate. Note that you calculate cash runway based on past data only. It is a simple way of estimating the number of months a company has before it runs out of cash that requires few assumptions.
2 - Why is cash runway an essential KPI?
The SaaS business model often involves spending money to develop a product before collecting any revenue from going to market. The growth phase often requires spending in advance (particularly hiring) before generating larger revenues. This means that you need to keep a close eye on your cash flow to avoid cash shortages.
2.1 - The cash runway shows how long the company can survive
Lack of cash flow often means the end of the entrepreneurial venture. No company can function without cash. So it's essential to have precise, reliable KPIs to know how long the company can survive given its current cash burn rate. Can it operate for another year with the same cash burn? Is there only 6 months left before the business dies? Thanks to this indicator, you can react in time and look for solutions to extend your runway.
2.2 - Obtaining financing in a tighter economy
The cash runway is all the more important as economic conditions have tightened considerably since 2022. With prices rising, the European Central Bank is regularly raising its key interest rates in an attempt to halt and reduce inflation. In turn, this makes financing more expensive, and banks are turning off the credit tap. Fundraising is becoming more complex and rarer.
Investors are more selective. They look closely at how startups are run, their cash burn, and their actual or projected profitability. Keeping an eye on your cash runway is therefore doubly important, whether you're trying to secure financing or opt to run your business independently. That's why good financial reporting is so important.
3 - How can you extend your company's cash runway?
When SaaS managers see that the cash runway is running short, they have a number of options open to them. The important thing is to have a reliable, up-to-date indicator, and to react early enough.
3.1 - Improve revenues from customers
The first option for extending the cash runway is to increase sales-related cash receipts. This may involve:
• reduce the discounts and promotional offers available to certain customers;
• review pricing to maximize upsell and average basket per customer;
• push longer subscriptions that allow you to collect a larger amount at the outset, even if it means offering them at a lower price;
• lower the churn rate, because gaining a new subscriber is always more expensive than building loyalty.
3.2 - Reduce SaaS operating costs
When the cash runway is running dangerously low, it's also time to economize. Close monitoring of expenses automatically extends the cash runway. For example, the startup may opt to reduce hiring and invest less money in suppliers, freelancers, or marketing agencies.
3.3 - Review or postpone investment and R&D projects
If the SaaS company is planning to modify its services by adding new functionalities, one scenario for extending the cash runway may be to postpone this project. Even if R&D costs are amortized in the company accounts over several years, they put an immediate strain on cash flow, as they generally involve hiring. Postponing such an investment plan is one way of optimizing the cash runway.
3.4 - Analyze all possible financing options
It's true that fundraising and bank loans are becoming more difficult to obtain. Nevertheless, financing remains an essential means of ensuring your company's long-term viability. By raising financing, you increase your cash balance and extend your cash runway.
The cash runway is therefore one of the strongest signals for your day-to-day management. Be sure to include this KPI in your financial reporting. For added peace of mind, you can entrust its preparation to a specialist like Fincome. We have a thorough understanding of SaaS requirements, and our platform is designed with you in mind. Request your free demo of how our solutions help you track cash runway and other SaaS KPIs.
💡 Complete your reading with the following articles:
- All about ARPU and ARPA
- All you need to know to calculate monthly recurring revenue
- Bottom line versus top line versus EBITDA: all you need to know for your SaaS
- SaaS metrics for startups: Which ones are key for your company?
- Annual recurring revenue: what it is and how it’s calculated
- How to calculate LTV and track your SaaS performance
- The vital importance of customer acquisition cost for SaaS management
- Why SaaS reporting is a must (plus the best KPIs)
