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Months of Safety (Cash Runway) — Simple Example
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From Service Leadership's Rapid Recovery Planning Guide
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https://service-leadership.com/news-events/news/2020/q2/
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Instructions:READ ONLY. Make a copy or download to edit. Enter values in highlighted cells.
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CategoryTodayRisk Adj. %
Risk Adjusted
Notes
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Balance SheetCash + Collectable A/R$200,0005%$190,000Some A/R will be uncollectable.
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Current Liabilities$80,0000%$80,000
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Long-term Liabilities$25,00066%$8,500Likely only 1/3 of long-term liabilities will have to be paid this year.
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Total Liabilities$105,00016%$88,500
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Net Balannce Sheet Cash (Cash + A/R - Total Liabilities)$95,000-7%$101,500Because not all our long-term liabilities come due this year, we have a bit more breathing room that a "pure" Balance Sheet would indicate.
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Income StatementRevenue$100,00015%$85,000Some clients will go broke, some will need fewer devices, some may want to pay less. New client acquisition slows down.
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Cost of Goods Sold (COGS)$70,0000%$70,000Product COGS drops to zero when you stop ordering product, but Service payroll continues as is unless you reduce it.
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Gross Margin$30,00050%$15,000It's likely that GM$ will drop faster than Revenue dollars, but we tend to cut service payroll more slowly than service revenue drops.
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Sales, General, & Admin$25,5000%$25,500We can't see how we can reduce SG&A at all, especially if we want to keep marketing and selling.
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Net Income$4,500333%-$10,500We are projecting a monthly bottom-line loss. The Risk Adj. % is positive, but that's not good because the numerator is negative.
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Net Income %4.50%375%-12.35%We are projecting a monthly bottom-line loss. The Risk Adj. % is positive, but that's not good because the numerator is negative.
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Months of Safety (#1)
(Net Balance Sheet Cash divided by the sum of COGS and Expenses)
0.99-7%1.06The traditional rule of thumb is to have enough cash and collectable A/R to cover 6 months of expenses if Revenue completely stopped. This company has barely 1 month. Its safety went up 7% in the "Risk Adjusted" column because we recognized on the Balance Sheet that the full Long-Term Liability woon't be due this year.
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Months of Safety (#2)
(Net Balance Sheet Cash divided by the bottom-line loss that needs to be covered by it)
(Forever, as long as Net Income is positive)9.67This measure of safety assumes some Revenue will continue (in this case, the amount shown in the "Risk Adjusted" column) so the drain on the Net Balance Sheet Cash is slowed by this Revenue, even though we are still losing money at the bottom line. We have 9.67 months of ability to pay our bills and cover the Net Income loss, if Revenue and costs stay the same as shown in the "Risk Adjusted" column.
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