Key takeaways
- The runway that supports decisions is usable cash divided by monthly net cash outflow, not cash divided by total expenses.
- A fall in sales does not make cash outflow rise by the amount of sales lost, because variable costs fall too. What really hurts is the lost contribution margin combined with the fixed costs that remain.
- In the example, a 30% fall in sales gives a runway of 7.5 months, which drops to 5 months if the bank cuts the credit facility.
"How many months would your company last if sales dropped 30% tomorrow?" is a question no owner wants to answer, yet many have had to answer it for real when revenue suddenly stopped. If you cannot answer it, it is like trekking through a forest without knowing how many days of water are left. You may be walking well today, but you will only find out that you should have turned back when it is too late.
What runway is, and the formula that is often misused
The formula most often seen is cash divided by monthly expenses. It works in only one case: when revenue is zero. Where sales fall only partly, you need to look at net cash outflow.
Runway (months) = usable cash ÷ monthly net cash burn
Net cash burn = cash fixed costs + monthly debt service - cash contribution margin
The phrase "usable cash" is very important. Deduct cash that is subject to conditions, such as guarantee deposits, money in accounts controlled by the bank, taxes that are due, and the minimum needed to cover one payroll cycle. Count only committed facilities, because facilities that the bank can cancel tend to disappear exactly when they are needed most.
Example: testing sales falls of 10, 20 and 30%
In this hypothetical example, normal sales are THB 10 million per month, variable costs are 60% of sales, cash fixed costs are THB 3.0 million, loan instalments are THB 0.6 million and cash is THB 9 million. THB 3 million is set aside as the minimum balance, leaving usable cash of THB 6 million.
| Case (THB million/month) | Sales | Contribution 40% | Fixed + debt | Net | Runway (months) |
|---|---|---|---|---|---|
| Performing | 10.0 | 4.0 | 3.6 | 0.4 | No reserve used |
| Down 10% | 9.0 | 3.6 | 3.6 | 0.0 | Cash break-even |
| Down 20% | 8.0 | 3.2 | 3.6 | (0.4) | 15.0 |
| Down 30% | 7.0 | 2.8 | 3.6 | (0.8) | 7.5 |
In the 30% case, if the bank also cuts the THB 2 million facility currently in use, usable cash falls to THB 4 million and runway shortens to 5 months. If you used the formula of cash divided by total expenses, ignoring receipts, you would get 6 ÷ 7.8 = 0.77 months, which does not reflect a case where 70% of sales remain.
The table gives two messages. First, cash break-even is at sales of THB 9 million, so this business has a safety margin of only 10%. Second, if fixed costs can be cut by THB 0.3 million per month in the 30% case, outflow falls to THB 0.5 million and runway rises from 7.5 to 12 months. Cutting fixed costs early therefore achieves more than waiting until cash is low and then cutting.
What a simple model does not show
The example above assumes everything is constant every month. In reality, the timing of cash needs further adjustment.
- Receivables In the first month after sales fall, the company still collects cash from earlier sales, so cash looks better than the reality. But when the economy turns bad, customers also tend to pay more slowly.
- Payables Last month's purchases still have to be paid in full, and suppliers may shorten credit terms when they hear the news.
- Inventory Goods already ordered will pile up when sales fall, so more cash is tied up in the early period.
- Redundancy costs If headcount has to be reduced, a lump sum goes out immediately under labour law, before costs actually fall.
- Loan conditions Lower sales may push DSCR below the threshold and affect the use of facilities.
For real estate projects, most costs are tied to construction contracts and do not fall with sales, so you should test separately for cancelled bookings, buyers deferring their instalments and delayed transfers.
Setting action triggers before the event
The advantage of calculating in advance is that you can agree, while still calm, what to do and when. The thresholds below are only a starting point; each business should adjust them to its own situation.
| Runway in the stress case | Status | Decision |
|---|---|---|
| More than 12 months | Performing | Review quarterly |
| 6-12 months | Watch | Defer uncommitted CAPEX, speed up collections, negotiate a standby facility |
| 3-6 months | Warning | Cut fixed costs, talk to the bank before a covenant is breached, suspend dividends |
| Under 3 months | Critical | Prepare a weekly cash plan, sell assets, raise equity or seek advice on debt restructuring |
Next steps
- Separate costs into variable and fixed, and calculate cash break-even including loan instalments.
- Count usable cash, and identify which facilities are committed.
- Run three cases, with sales down 10%, 20% and 30%, then add a case where customers pay one month late.
- Write a list of cost reductions, with the amount and the time when the effect is actually seen.
- Agree the action triggers with shareholders and management.
- Update the figures at least every quarter, and whenever there is new debt or a new block of fixed costs.