Developing a Financial Runway
January 16, 2024
Welcome back to Business Unfiltered with Mercer and Jeff Sauer today's topic is Developing a Financial Runway
0:00: Financial runway for businesses. Mercer defines financial runway as the amount of time a business can keep operating with its current expenses, based on the amount of money it has in the bank. Jeff agrees, adding that he measures a financial runway in terms of time, such as months or weeks, to determine how long a business can continue operating if revenue drops to zero. Mercer mentions the idea of a "financial runway" and how it's evolved over time, with a goal of having enough money to invest in the business without being too conservative. Jeff shares his own experiences with hiring employees despite not having the full salary amount in the bank, taking calculated risks to grow the business.
4:26: Financial planning and emergency funds for a business. Jeff uses a 3-6-12 month runway guideline for aggressive hiring, considering payroll expenses as the biggest factor. Mercer prioritizes having enough runway to figure out the next step if everything goes down to zero, with a goal of at least 2 weeks of payroll coverage. Mercer discusses his approach to financial management, prioritizing long-term stability over short-term gains. He views financial management as more than just revenue, including credit card limits and emergency funds. He believes in setting up multiple sources of finance to extend his financial runway, rather than relying solely on cash reserves.
9:32: Financial mindset and risk management. Jeff discusses the importance of maintaining a conservative financial mindset, even when thinking that it's unlikely to go to zero. He emphasizes the need to balance being too conservative with being aware of the potential for unexpected events, such as a black swan event.
11:18: Financial runway and risk management for businesses. Jeff discusses the challenges of managing expenses during a pandemic, highlighting the need to adjust one's mindset from "it's going to go to zero" to "there's always a chance it could go to zero." Mercer agrees, noting that big, high-ticket expenses like payroll can be particularly challenging to manage during uncertain times. He emphasizes the importance of being aware of the possibility of revenue going to zero while also building reserves and managing expenses.
16:15: Financial runway and risk management for small businesses. Jeff discusses the importance of runway for small businesses, emphasizing the need for redundancy and backup plans to survive setbacks. His approach involves considering how many months of living expenses he has, as well as how many pieces of redundancy he has to see his business through to completion.
20:13: Financial discipline and business success. Jeff discusses the importance of iterative approaches and learning from mistakes in business and sports. Revenue growth in business is unpredictable and can happen slowly or quickly, and spreadsheet projections are often inaccurate. Financial discipline is key to success, as it allows for controlled spending and revenue growth.
23:30: Managing business reserves and financial discipline. Mercer reflects on growth and reserves, it’s harder to save three months of expenses now than five years ago. Jeff expresses frustration with the "curse of more," where having too much money can lead to overspending and depleting reserves. He suggests having a financial discipline plan in place to avoid this scenario, including setting a target number of days for reserves and regularly reviewing and adjusting the plan as needed.
26:33: Financial runway management for businesses. Jeff emphasizes the importance of making more money through sales and controlling expenses to ensure a business's financial success. Mercer agrees with the idea of momentum and accepting where a business is in its growth stage, with a focus on proper number analysis for decision-making.
Topics Covered In This Episode
- Defining Financial Runway: The podcast kicks off by explaining what financial runway means for businesses, referring to it as the duration a business can function with its existing funds and expenses. Mercer and Jeff Sauer both measure it in terms of time, like months or weeks, to assess the business's resilience in case of zero revenue.
- Evolution of Financial Runway: Jeff delves into how the concept of financial runway has evolved. The aim is to have enough funds to invest in the business without being overly cautious, emphasizing the importance of calculated risks in business growth.
- Financial Planning and Emergency Funds: The discussion shifts to financial planning, with Jeff using a 3-6-12 month guideline for hiring as payroll expenses can be a significant factor. Mercer prioritizes having enough runway to navigate uncertainties, aiming for at least two weeks of payroll coverage.
- Mindset and Risk Management: The hosts emphasize maintaining a conservative financial mindset even when success seems certain. Jeff underscores the balance between caution and acknowledging the potential for unexpected events, such as black swan events.
- Challenges and Solutions: Mercer and Jeff discuss managing expenses during crises, such as a pandemic. Jeff highlights the need to shift the mindset from "it's going to zero" to "there's always a chance it could go to zero." Mercer agrees, especially emphasizing the difficulty of handling big expenses like payroll during uncertain times.
- Financial Discipline and Success: Both agree that financial discipline is a key to success, as it allows for controlled spending and revenue growth. Jeff draws parallels between business and sports, emphasizing the importance of learning from mistakes and adapting to unpredictable revenue growth.