Cash is the lifeblood of any business. You can have strong sales, great products, and an excellent team, but if you run out of cash, nothing else matters. This is why building and maintaining a solid cash flow runway is one of the most critical responsibilities for any business leader.
A cash flow runway is simply how long your business can operate before running out of money. If you have $500,000 in the bank and spend $50,000 per month, your runway is 10 months. The goal is to extend that runway to 12 months or more, giving you breathing room to navigate challenges, invest in growth, and sleep better at night.
Why 12+ Months Matter?
Twelve months isn't an arbitrary number. It's the minimum buffer that gives you real financial security and strategic flexibility.
With 12+ months of runway, you have time to pivot if your current strategy isn't working. New directions might take 6 to 9 months to show results. You can raise funding from a position of strength rather than desperation, getting better terms. You can weather unexpected storms like economic downturns, supply chain disruptions, or key customer losses. Most importantly, you can focus on growth rather than survival.
Step 1: Know Your Numbers Cold
You can't manage what you don't measure. Start by understanding exactly where you stand.
Calculate Your Current Runway
Take your current cash balance and divide it by your average monthly cash burn (what you spend minus what you collect). If you have $300,000 in cash, spend $60,000 per month, and collect $40,000, your monthly burn is $20,000. Your runway is 15 months. That's healthy.
Track Cash Weekly
Don't just check your bank balance monthly. Track cash flow weekly, knowing exactly what's coming in and going out. This early visibility helps you spot problems before they become crises.
Understand Your Fixed and Variable Costs
Fixed costs stay the same regardless of activity: rent, salaries, software, and insurance. Variable costs change with volume: materials, shipping, and commissions. Knowing the breakdown helps you identify what you can adjust quickly if needed.
Step 2: Increase Cash Coming In
The most direct way to extend your runway is to bring in more cash faster.
Accelerate Customer Payments
Offer small discounts for early payment (2% off if paid within 10 days). Send invoices immediately when work is complete. Follow up promptly on overdue invoices. For larger deals, request partial payment upfront or milestone payments rather than waiting until completion.
A consulting firm might shift from invoicing at project completion to requiring 30% upfront, 40% at midpoint, and 30% on completion. This dramatically improves cash flow even though total revenue stays the same.
Review Your Pricing
Even a 5% to 10% price increase, if your value justifies it, can significantly extend your runway. A business with $500,000 in annual revenue and 40% margins that raises prices 10% adds $50,000 to cash flow with no additional costs.
Focus on High-Cash Customers
A customer who pays immediately is more valuable than one who pays in 90 days. A customer on a monthly subscription provides predictable recurring cash. Focus your sales efforts on customer segments with the best cash characteristics.
Collect Deposits or Advance Payments
For projects or custom work, request deposits before starting. A software company moving from monthly ($100) to annual ($1,000) billing receives 10 months of cash upfront, massively improving its runway.
Step 3: Reduce Cash Going Out
Reducing cash outflow is often faster and more within your control than increasing inflow. The key is being strategic, not just slashing everything.
Prioritize Expenses
Categorise every expense: essential (business stops without these), important (business suffers without these), and nice-to-have (helpful but not critical). Eliminate nice-to-haves and scrutinise important expenses.
Negotiate with Vendors
Request extended payment terms (pay in 60 days instead of 30). Ask for volume discounts. Consider switching to lower-cost alternatives for non-critical services.
A manufacturing company might negotiate with top suppliers to extend payment terms from 30 to 45 days. If they're paying those suppliers $200,000 monthly, this effectively gives them $100,000 in additional cash immediately.
Review Subscriptions and Services
Conduct a quarterly audit of software subscriptions, services, and memberships. Cancel what you don't need. Downgrade to cheaper plans where usage doesn't justify premium tiers. These small amounts add up.
Optimize Inventory
For product businesses, inventory ties up cash. Reduce slow-moving items. Implement just-in-time ordering where possible. Run promotions to clear excess stock, even at reduced margins.
Defer Non-Essential Investments
That office renovation, new equipment, or expansion project might be valuable long-term, but if it's not critical, defer it. Preserve cash now and revisit when your runway is stronger.
Step 4: Manage the Timing
Cash flow is as much about timing as absolute amounts. Smart timing management can significantly extend your runway.
Align Payables with Receivables
Match when you pay bills with when you collect from customers. If customers pay you in 45 days, negotiate 45-day payment terms with suppliers rather than paying in 15 days.
Use Payment Terms Strategically
Take full advantage of payment terms. If a vendor gives you 30 days to pay, don't pay on day 5. Use that time for the cash to work for you.
Consider Financing for Large Purchases
Sometimes it makes sense to finance equipment or large purchases rather than paying cash, even if you could afford it. A $100,000 piece of equipment financed over three years preserves $100,000 in cash runway at the cost of some interest.
Step 5: Build Cash Reserves Systematically
Once you've stabilised your runway, systematically build reserves to reach and maintain 12+ months.
Set a Savings Target
Decide on a percentage of revenue or profit to set aside each month into a reserve account. Even 5% to 10% adds up over time.
Create a Dedicated Reserve Account
Keep your operating cash and reserve cash in separate accounts. This prevents accidentally spending reserves on day-to-day operations.
Define What Counts as an Emergency
Be clear about when you'll tap reserves. True emergencies only: unexpected economic downturns, major customer losses, or critical unforeseen expenses. Not routine shortfalls or new initiatives.
Step 6: Diversify Revenue Streams
Relying on a single customer, product, or revenue source is risky. Diversification improves cash stability.
Reduce Customer Concentration
If one customer represents 40% of your revenue, losing them could be catastrophic. A good rule is that no single customer should represent more than 15% to 20% of revenue.
Add Recurring Revenue
Recurring revenue from subscriptions, service contracts, or memberships provides predictable cash flow. A business with 50% recurring revenue has much more stable cash flow than one with 100% project-based revenue.
Step 7: Secure Access to Credit Before You Need It
Credit is easiest to get when you don't desperately need it.
Establish a Line of Credit
A business line of credit lets you borrow cash when needed and repay when cash flow improves. Even if you never use it, having access to $50,000 or $100,000 provides a cushion.
Build Relationships with Lenders
Don't wait until you need money to talk to banks. Build relationships early. When you eventually need financing, you're a known quantity, not a stranger asking for help.
Real-World Example: Turning Around a Cash Crisis
A small software company with 25 employees had $180,000 in the bank and was burning $60,000 per month, giving them only 3 months of runway. The CEO acted quickly:
Immediate actions: Negotiated 60-day payment terms with top vendors instead of 30 days, freeing up $40,000. Cancelled $3,000 in monthly subscriptions that they barely used.
Revenue acceleration: Shifted to requiring 50% deposits upfront. Offered 3% discount for customers paying within 10 days. Focused on annual subscriptions paid upfront.
Cost optimisation: Implemented a hiring freeze. Switched to less expensive office space, saving $4,000 monthly. Reduced monthly burn from $60,000 to $52,000.
Building reserves: Set aside 10% of monthly revenue into a reserve account. Established a $75,000 line of credit.
Results: Within 6 months, monthly burn dropped to $48,000 while cash collections increased to $55,000, creating positive cash flow. After 12 months, they had $320,000 in the bank plus access to a $75,000 credit line, giving them real financial security.
Warning Signs Your Runway Is at Risk
Stay alert for these danger signals:
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Consistently dipping into reserves for operating expenses
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Paying bills late or stretching payment terms beyond agreements
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Celebrating revenue that takes 90 days to collect
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Expenses growing faster than revenue
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Losing sleep over making payroll or paying bills
The Bottom Line
Building a 12+ month runway isn't a one-time project. It's an ongoing discipline that requires attention even when things are going well. The time to extend your runway is when you don't desperately need to, not when you're down to your last few months of cash.
The path to a 12+ month runway is straightforward: know your numbers, increase cash coming in, reduce cash going out, manage timing carefully, build reserves systematically, diversify revenue, and secure credit access. None of these steps is particularly complex, but together they create financial resilience.
