How to extend your runway

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mins
November 24, 2022
Business Growth

Last week’s Autumn Statement and the report from the Office for Budget Responsibility (OBR) that went with it painted a bleak picture of the UK economy.

 

We’re either diving headlong into a recession or have already splashed down in the middle of one. There are several implications of this for founders, but it is particularly relevant (and stressful) for founders whose business is not yet at the stage where it can stand alone.

 

And there has been a major shift in the way we grow businesses over the last decade – partly fuelled by low interest rates and the ready availability of cheap money –  it has become an accepted (almost expected) model to aim for growth-first and profits (much) later. It’s an approach favoured by digital scale-ups and means many fairly substantial businesses, at least in terms of revenue and headcount, rely on investors to keep them afloat.

 

But in an era where the flow of investments is receding, it’s no longer so easy to keep going back for another round of investment. The fear of running out of cash looms ever larger. And “out of cash” remains the rock upon which most businesses that fail eventually crash.

 

Lynne Blakey, a partner at advisory firm Evelyn, confirms there has been a drop in investment activity.

 

“Quarter3 saw a marked reduction in investment activity, as investors reacted to the current economic climate and political uncertainty,” she says.

 

Blakey adds that this, combined with the backdrop of rising costs and interest rates, supply chain issues and escalating energy bills, is leading founders to start questioning how long they have left.

Burn, churn and the runway

The length of time a business has before it runs out of cash is known as it runway. Blakey suggests there may be as many business owners thinking about the warning lights flashing at the end of their runway as airline pilots.

 

“More founders are asking what steps they need take to extend runway and improve their mid-term viability,” she says.

 

The first step is to establish how long your current runway is and whether that is sufficient to get you to the position where the business is either positive cash generative, or there is a next agreed funding injection.

 

“Escalating costs and energy prices may mean your runway has significantly shrunk from what it was a few months ago,” she advises, adding that founders need to update such calculations regularly to ensure they understand their precise situation.

 

“Ensure you have a detailed profit and loss and cash flow forecast that you can easily sensitise. This will allow you to model your runway under various scenarios and help you identify ways to limit your cash burn.”

 

Keep an eye on costs

Perhaps a natural step is to examine all costs in detail and ensure you have strong processes and controls in place in relation to any spending.

 

“Are your costs essential to the ongoing operation of your business, or can they be reduced or eliminated altogether?” asks Blakey. “Can you identify efficiencies or different ways of doing things which can save you money?”

 

Examples include renegotiating with suppliers, reducing resource use, limiting entertaining and travel spend, putting a hold on costly marketing campaigns to focus on organic media and brand awareness and replacing expensive established providers with cheaper upcoming businesses and new market players.

 

“Also consider whether there are opportunities to partner with other businesses to promote each other’s products and services, or to combine your offering to appeal to a wider customer base, or share resources such as office space.”

 

Look to the people first

Staff are usually one of the biggest costs within most organisations. But, says Blakey, staff are also your biggest asset. As a scale-up, more so than an early stage start-up, you may not be able to reduce staff numbers significantly without impacting operations.

 

“That said, put a hold on recruitment and new hires for a while. Recruitment and training new staff are expensive and put a strain on resources.You should focus on retention of, and maximising the contribution from, your existing team.”

 

Do a product review

Blakey advises all founders to review products and services and consider whether they can diversify into new markets to spread their risk.  

 

“While developing new products takes time and energy, think about how you can adapt existing products and services to appeal to new markets and attract new customers.”

 

Here Blakey says there are lessons from the pandemic. “During Covid, the businesses that thrived were those able to identify a need and adapt their offering to expand into new markets.”


It’s good to talk  

Regardless of the steps you take, Blakey says it is important not to feel you are alone or acting in isolation. Joining a community of fellow scale-up founders, such as Helm, can be a huge help.

Blakey also suggests engaging with funders.  “Investors expect a level of losses and if you can establish you have a credible and capable management team, with well thought out projections and a proactive plan, it builds confidence in the business, comfort around future investment and makes it more likely they will continue to support the business.”  

 

But look for alternatives

Blakey says it is also sensible to explore different funding options.

While often seen as a route more suited to earlier stage companies, crowdfunding may be an option.

“It hasn’t seen as significant a reduction as other sources of equity funding. Investors may also be more likely to invest in convertible debt funding, as opposed to equity while there are also a range innovative debt funding solutions in the market that can be linked to your working capital cycle,” says Blakey.

 

She also suggests exploring grants, tax reliefs and other incentives that may be open. While it underwent some adjustments in the Autumn Statement, businesses that invest in innovation are often able to claim R&D tax relief, for example. This can include cash tax credits for loss-making businesses.

 

“The recent HMRC crackdown on fraudulent claims means it is important to ensure that any claim you make are correct and clearly supportable,” says Blakey. “Helpfully, most R&D tax experts offer contingent fees, meaning you don’t pay a penny unless they are able to make a successful claim.”

 

Lastly, Blakey suggests reaching out to any local enterprise partnership and growth hubs to investigate what support and funding may be available to at a local level.

 

If there was one over-riding message in the Autumn Statement, it was the idea that we need a dose of measured, calm growth – as opposed to the madcap “growth, growth, growth” agenda under Liz Truss. And there are parallels, suggests Blakey, for founders.

“Any measures you take must be assessed to make sure they don’t stifle growth unnecessarily. It is a balancing act. There may be a need to sacrifice overly-aggressive expansion plans, in favour of a more measured approach to match the current economic climate.”  

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