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How to Extend Your Cash Runway During an Economic Downturn: A Strategic Checklist

Business ebbs and flows are a fact of life. It’s like riding a wave; you want to accept the flows and find the best ways to deal with the ebbs.

Lydia Stone has more than 20 years of experience building and leading accounting organisations. She managed IPO, primary and secondary financing transactions, M&A, and full range public company accounting operations, including accounting, financial reporting, tax, treasury, financial systems and audit functions.

Stone previously held the roles of chief accounting officer for Blackboard and Evolent Health, and various leadership roles in BAE systems and Ernst & Young LLP. She currently serves as chief accounting officer at Chargebee.

Here she shares five ways to extend a cash runway.

Lydia Stone, chief accounting officer, Chargebee
Lydia Stone, chief accounting officer, Chargebee

Slowdowns can be worrisome if you are a small or relatively new business with a low cash reserve. Businesses should continuously plan for the long term and anticipate possible downturns. If a downturn turns into reality, companies should respond with careful planning and not lose sight of their long-term goal.

The word ‘recession’ instantly tightens purse strings, and while frugality is prudent in our current climate, it’s imperative to remain cognisant of the bigger picture.

Extending your cash runway is not just cutting down on non-essential expenditure but a strategic exercise; you want to trim the fat without cutting into your revenue engines that fuel sustainable growth.

So experiment, innovate, and stand out.

It’s ideal to have at least a 24-month runway ahead of you. Here are some ways you can extend your cash runway.

  1. Analyse your market and think outside the box
  2. Retain existing customers
  3. Plug revenue leakages
  4. Scenario planning
  5. Invest in data analytics and build data literacy
Analyse your market and think outside the box

While it is easy to think ‘cut expenditure’, there have been plenty of businesses that not only survived but thrived in a not-so-ideal macroeconomic environment by thinking outside the box. What are the additional ways to generate revenue?

What are the channels that were not your focus when mainstream channels kept you plenty busy? Is there an additional or different customer segment, geography, industry, or demography that you can tap into? Could a slight tweak to your product or your way of selling satisfy new market demand? For example, during Covid, clothing companies like Nike launched a slightly different clothing line designed for people working from home. Uber, a taxi business that transports humans, became a food delivery business. A slight tweak launched them into a multi-billion dollar new business line. Brainstorm new ideas with your employees and your advisors.

Without slashing your prices, there are other ways you can increase new sales. If you don’t have one, consider offering a subscription model for your product or service. You can tap into new customer segments by lowering the barrier of entry and encouraging people to try out your product with free trials.

In case you already have a subscription model, consider reevaluating your pricing model. Continual price optimisation has been proven to shoot up your growth trajectory over the months. There might be a better way to monetise your product; a tech stack enabling you to run pricing experiments painlessly is a must-have for scale-up companies.

Your customer’s relationship with your business is a function of ‘perceived value.’ Usage-based billing is emerging as a strategic pricing method that capitalises on this sentiment. Usage-based billing adoption is expected to be 56 per cent for SaaS companies by 2023. This pricing model shift arguably requires
infrastructure support. You should be able to break down your service into measurable chunks to identify your value metric (the quantity whose usage you can bill) and the tech stack to support your operations. These efforts can have high-paying dividends; ‘pay for what you use’ gives your brand an air of transparency and trustworthiness.

Retain existing customers

It costs six-times to seven-times more to acquire a new customer than to retain an existing one. On average, it makes sense to focus on retention; during a crisis, you wouldn’t be wrong to direct your attention to ramping up your retention game. Improving your retention rate also has a compounding effect on your revenue growth. A mere increase of five per cent in retention boosts profits by 25 per cent.

In survival mode, it’s harder to convince people to make new purchases; the cost of acquiring new customers increases significantly. Focusing on preserving and strengthening your relationships with existing customers becomes critical.

Build a churn deflection funnel with intelligent cancel experiences to understand why your customers churn so you can offer the right solutions to make them stay.

Plug revenue leakages

During uncertain times, every penny counts. A critical step in maximising your cash flow is plugging the revenue leakages in your billing process. Improper receivables management – either through manual methods or ineffective automation – quickly drums up a big hole in your balance sheet. An intelligent
dunning system can significantly reduce payment failures and involuntary churn.

Investing in an integrated billing plus receivables system that automates your entire AR workflow can lower your collection costs without jeopardising your end-user experience.

Scenario planning

People advise you to prepare for the uncertainty, yet no one could have seen the Covid-19 pandemic coming. While we get the occasional reality check about the illusion of control, scenario planning is still a credible way to mitigate risk and identify potential outcomes and how your organisation would respond to them.

Map out all the plausible scenarios that could play out – the good, bad and the ugly – and determine your preparedness on the financial and operational front. What if your cost of acquisition (CAC) triples with increasing inflation rates? How long can you stay afloat with negative net customer addition? What if you have an unanticipated increase in demand? Can you forecast potential revenue goals and estimate the cash flow for all the scenarios?

Scenario planning would help you understand how your company survives and thrives in different economic scenarios. You probably don’t need any fancy recovery curves, but having a scenario matrix with precise internal and external triggers could give you clarity on choosing the path you need to take.

Scenario planning can be an effective financial tool that ensures you can act quickly and decisively during a crisis.

Invest in data analytics and build data literacy

A subscription business has several moving parts that extend from product, marketing to sales and finance. You must constantly monitor all these moving parts to ensure your business stays healthy. An analytics tool that can consolidate data from multiple functions to give you a coherent view of your business is a great value addition to your tech stack.

Real-time insights can act as critical indicators for your business health. In the short term, your AR aging report can predict your cash flow for the month, and your churn dashboard can give you a big-picture perspective on retention patterns and customer health.

Equally important is enabling your employees to interpret reports skillfully and approach dashboards with an insight-driven approach. Long after we’ve embraced the ubiquity of data and advocated data-driven decision-making in our organisations, there have been insufficient efforts to improve employee data literacy. A Tableau study has found that data literacy investments yield tangible business benefits.

Data literacy combined with the right tech stack can create a formidable competitive advantage.

Show me the money

Unless you have a fairy godmother or deep-pocketed investors willing to back you, you’re out of business if you’re out of cash. In a climate characterised by rising interest rates, your company could experience a cash crunch. While macro factors remain unpredictable, you should obsessively focus on ensuring your business has a well-thought strategy and comfortable cash runway to survive and thrive through the turbulence and make it to clear skies again.

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