What is cash runway?

Cash runway is the number of months a company can operate based on its current cash and expected cash flow. You can estimate it with forecasts or calculate it based on your burn rate.

A business burning cash spends more than it earns. Your burn rate is the difference between cash expenses and cash revenue. If your company’s burn rate is €10,000, you're spending €10,000 more than you earn each month.

How to calculate cash runway

To calculate the cash runway, divide the current cash balance by the monthly burn rate (average monthly cash expenses) to find a company’s cash runway in months.

The cash runway formula is: Cash at Hand / Projected Burn Rate

For example, a company spending €10,000 a month with €100,000 in cash has a 10-month runway.

The importance of cash runway

The cash runway is critical because it defines how long a company can operate without new funding or turning a profit. Run out of cash, and the business faces closures or severe cuts. Knowing your runway helps guide key decisions. A longer runway means more room for growth, risk-taking, and strategic investments. A shorter one demands survival mode: cutting costs or raising funds quickly.

A longer runway also strengthens your hand with investors. If you’re low on cash, they’ll push harder for unfavorable terms. A solid runway, however, puts you in control. Unpredictable business environments can bring surprise costs or revenue drops. A longer runway offers a buffer, giving you time to adapt or execute contingency plans.

For growing companies not yet profitable, a strong runway allows investments in product development, customer acquisition, and scaling – without the pressure to generate profit immediately. With 12+ months of runway, businesses can focus on growth, test new strategies, and refine operations without scrambling for cash.

Now, you know the basic elements of cash runway. Let's look at asset-light companies and their specifics in handling cash runway.

Understanding asset-light companies

An asset-light company is a business that minimizes its ownership of physical assets. This allows them to be more agile and adaptable, scaling operations up or down quickly in response to market changes. It also reduces the risk of getting stuck with excess equipment or infrastructure.

Examples include software companies (SaaS), consulting, logistics, and even some manufacturers who outsource production. These models are popular in industries such as tech or business services.

The debt challenge for asset-light businesses

Securing traditional debt can be an uphill battle for asset-light companies, despite their agility and scalability. The primary challenges lie in:

Limited collateral

Traditional lenders rely on physical assets like real estate or machinery as collateral. Asset-light businesses, by nature, have minimal such assets, making it more difficult to secure traditional loans.

Risk perception

Lenders may perceive asset-light models as riskier due to their reliance on technology, customers, and external partners. This concern is particularly notable for young companies with limited operating history. Lenders often prefer to work with businesses that have a proven track record of generating consistent revenue and profits, which can be challenging for asset-light companies in their early stages.

Complex financial metrics

Traditional lenders struggle to assess asset-light businesses using standard metrics focused on physical assets. Asset-light companies often operate with different financial metrics, outside the scope of a classic risk analysis model. 

How the debt challenge affects cash runway

Traditional debt financing can be difficult for asset-light companies due to their lack of collateral and perceived risk by lenders. This restricts their ability to add debt to their capital structure.

A well-balanced financing mix is crucial for companies to achieve strategic objectives, financial flexibility, and manage capital costs effectively. When debt is not readily available, achieving this balance becomes a challenge.

Over-reliance on equity: dilution and control issues

Asset-light companies often have to rely more heavily on equity funding, such as VCs or angel investors. While this provides access to substantial capital without collateral, it comes at a cost. 

Investors receive stakes in the company, diluting existing shareholder ownership. Companies may lose control over decision-making.

Higher cost of capital

Equity funding is typically more expensive than debt, leading to higher capital costs. Initially, it might appear that equity financing carries no immediate costs. However, these costs often materialize later on, particularly when a substantial portion of exit or IPO profits must be distributed to investors, affecting both founders and employees.

Additionally, limited access to additional funding sources like debt can also restrict a company’s ability to pursue growth initiatives. It restricts their ability to:

• Navigate market volatility
• Invest in growth opportunities
• Experiment and iterate on offerings
  

That’s why asset-light companies need to find different ways to sufficiently fund their cash runway and thus operations. One way is to add alternative debt funding to their capital stack.

Cash runway and alternative debt financing

Alternative financing encompasses non-traditional sources, such as venture debt, working capital, or convertible loans. It contrasts with traditional bank loans, which generally require significant collateral and a longstanding credit history. 

Yet, there are new alternatives available to companies. They offer more adjustable terms and are oftentimes more accessible to companies with less tangible assets, making it an attractive option for asset-light businesses.

How asset-light companies benefit from alternative debt

The nature of asset-light companies makes them ideally suited for alternative debt financing solutions. Alternative debt providers have a different perspective on risk analysis than traditional players. They take a data-driven approach, focusing on metrics like recurring revenue and customer base.

This allows even young asset-light companies to access debt funding and empowers them to showcase their creditworthiness based on growth potential, not just physical assets. This mitigates perceived risks and allows access to tailored funding solutions that provide capital while preserving equity and control.

Flexible funding and repayment structures

Moreover, such flexible debt funding solutions are adaptable. Funding amounts can be adjusted to a company’s business plan and cash flow needs. They continue to develop with the company. Repayments can be structured to match a company's needs, rather than adhering to a rigid schedule that might stifle their business plan or new opportunities along the way.

By utilizing such new risk models, alternative funding providers can offer debt tailored to the specific needs and risk profiles of asset-light businesses, enabling them to access capital more efficiently. 

How to use alternative debt to optimize cash runway

Numerous asset-light companies have leveraged alternative debt to propel them forward. These success stories highlight the transformational impact that the right funding can have on extending a company's cash runway, reinforcing market positioning, and catalyzing growth without using equity.

• Learn how Meisterwerk extended its cash runway to postpone its next equity round
• Learn how shore extended its cash runway to build a bridge to profitability
• Learn how ampere.cloud extended its cash runway to to maintain financial flexibility during the economic downturn

However, alternative debt financing isn't the only strategy for asset-light businesses to extend their cash runway. They can also explore various options to optimize their cash flow without using external financing.

Optimization of cash runway

If a company wants to optimize its cash runway it has to pay attention to several aspects. First, it has to understand what impacts the cash runway:

• Revenue: Higher revenue increases the cash runway.
• Expenses: Lower expenses extend the cash runway.
• Cash Inflows: Additional financing or increased sales can prolong the cash runway.
• Cash Outflows: Unexpected expenses or a decrease in sales can shorten the cash runway.

Keep an eye on the cash burn rate

It’s the rate at which a company is spending its available cash. It includes all kinds of expenses. Managing the burn rate effectively is essential for optimizing and finally extending the cash runway. This may involve reducing expenses, improving operational efficiency, or increasing revenue streams.

Make use of cash flow management

Regularly monitor cash inflow and outflow, and adjust forecasts based on changing circumstances to ensure the accuracy of cash runway projections. This includes assessing potential risks that could impact cash flow, such as market fluctuations, competition, or economic downturns, to better prepare for unforeseen challenges. 

Additionally, a company must conduct scenario analysis to assess the impact of various scenarios on the cash runway, such as best-case, worst-case, and most likely outcomes, to develop contingency plans accordingly.

Accurate cash flow forecasting helps in predicting future cash runway scenarios and enables proactive decision-making to mitigate risks and optimize financial performance. Part of this is efficient liquidity management that ensures the company maintains adequate cash reserves to support ongoing operations and unexpected expenses, thus extending the cash runway.

Other aspects of optimizing the cash runway

• Debt management: Companies need to evaluate the impact of debt obligations on the cash runway and consider refinancing or restructuring debt to improve cash flow and extend runway duration.
• Capital allocation: prioritize capital allocation decisions based on their potential impact on cash flow and the overall cash runway, focusing on initiatives that offer the highest return on investment.

Optimizing cash runway means continuous improvement 

Continuously review and refine cash management practices, operational efficiencies, and strategic initiatives to optimize the cash runway and enhance the company's financial resilience and sustainability.

Conclusion: securing sufficient cash runway for asset-light businesses

Securing the necessary cash runway is crucial for all companies, particularly those facing obstacles in accessing suitable funding and with restricted avenues for debt financing. This underscores the importance for asset-light businesses to explore diverse strategies to enhance their cash runway.

Reliance on equity poses challenges in constructing a resilient capital structure, as it often entails dilution of ownership and relinquishing control over the company. Alternatively, by leveraging alternative debt, asset-light businesses can strengthen their cash runway. This approach not only facilitates expansion and innovation but also preserves control and autonomy within the company.