If Revenue Dropped 20% Today, How Long Would You Last
THE SHORT ANSWER
Cash runway is the number of weeks or months your business can operate on available cash if revenue declines. It is calculated by dividing true available cash by the monthly cash deficit under a defined decline scenario. The scenario worth running is not a collapse. It is a 20% revenue decline, because that is the one that actually happens.
It started with a Tuesday when a client did not return a call.
The client was the company's second largest, $740,000 annually, eleven months into a twelve-month engagement with renewal conversations scheduled for June. The account manager called Tuesday. No return. He called again Thursday. Also no return. He flagged it to the CEO on Friday morning, in the way people flag things they do not want to be the one to raise.
"Probably just busy," the account manager said.
"Probably," the CEO agreed.
Then he called his CFO from the parking lot on the way to lunch and asked the question that had been sitting underneath the whole week. If they do not renew, what does that do to us?
She had already been running it.
What is a 20% revenue stress test?
It is a calculation of how long your business could operate if revenue fell 20% starting today. Twenty percent is not the worst case. It is the realistic one.
Twenty percent is what a major client not renewing looks like. It is what a softening market looks like. It is what losing a contract you expected to keep looks like. It is survivable in most businesses, if you have prepared for it. The businesses that get hurt are the ones that have never run the calculation before it happened to them.
How do I run it?
Four steps. It takes an afternoon.
Separate fixed from variable. Pull three months of bank statements and assign every line item to one of two columns. Fixed obligations run whether you bill one client or fifty: facilities lease, core payroll, software subscriptions, debt service, insurance. Variable obligations scale with volume: contractor costs, sales commissions, discretionary travel, marketing you could pause. When you are unsure about an item, put it in fixed. It makes the number slightly worse and considerably more honest.
Apply the decline. Take current monthly revenue and reduce it by 20%.
Calculate the monthly deficit. Reduced revenue, minus fixed obligations, minus the variable costs you cannot actually cut, gives you the monthly gap.
Divide your true available cash by that gap. True available cash, not the bank balance, net of restricted funds and committed outflows. The result is your runway.
What does the answer actually tell me?
In the book, the firm finds fixed monthly obligations of $420,000 against $1.5 million in monthly revenue. At a 20% decline, revenue falls to $1.2 million. True available cash is $280,000. Runway under the stress scenario, assuming aggressive variable cost cuts, is about eleven weeks.
Eleven weeks is not a crisis. Eleven weeks gives you time to act. You can negotiate with vendors. You can accelerate collections. You can have a real conversation with your banker rather than a desperate one.
Six weeks gives you almost none of that.
You can only choose between good options when you can see them far enough in advance to reach for them.
The point of the calculation is not the number. It is the distance between the number you have and the number that leaves you without choices.
What is my break-even cash point?
Your break-even cash point is the minimum monthly revenue required to cover fixed obligations without drawing on reserves. In the example above, it is $420,000 against current revenue of $1.5 million.
That single number belongs somewhere the whole leadership team can see it. In the book, the VP of Sales asks to have it added to his pipeline dashboard, and his reasoning is the right one. Every deal he closes moves the company toward that number or away from it, so he should probably know what it is.
How large should my cash buffer be?
Set the target as a number of months of fixed obligations rather than a flat dollar amount, because a figure that is adequate today can be badly inadequate a year from now if the cost structure has grown.
For a project-based business with revenue concentration, meaning a largest client in the range of 18% to 22% of total revenue, three months of fixed obligations is a reasonable hard floor. For the firm above, that is $1.26 million against a current position of $280,000.
That gap does not close overnight. It closes over two or three quarters, with the buffer funded from free cash before any discretionary spending is approved. Before distributions. Before the new office space. Before the technology upgrade. A hard floor, not a soft guideline.
What erodes the buffer?
Strong quarters, which is what makes it difficult.
The buffer rarely gets drained by one decision. It gets drained gradually. A large equipment purchase here. An advance on a buildout there. A distribution that felt well-deserved after a strong year. Each decision is individually defensible. Cumulatively they reduce the buffer without anyone ever making a deliberate decision to reduce it.
How often should this be run?
Quarterly, as a ninety-minute working session with the CFO, the controller, and one or two operational leaders.
Sit down with the current 13-week cash flow forecast and ask one question. What happens to our cash position if our top two clients reduce their engagement by 40%? Identify the likely compression weeks. Have the operations lead bring a list of variable costs that could be reduced within two weeks if the scenario began to materialize.
Then close with the only question that turns the exercise into preparation. If this became real tomorrow, what are the first three things we would do? Leave the room with named owners and dates.
The goal is not to predict which client goes quiet. The goal is to know the answer before anyone has to ask the question.
Is this pessimism?
No. It is the practice of asking the uncomfortable question in the comfortable moment, so that when the uncomfortable moment arrives you are already standing on solid ground.
The leaders who do this consistently are never the ones making panicked calls to their bank on a Tuesday morning. They have already run the numbers. They already know their floor.
The client in the story returned the call on June second. The renewal had never been in doubt. They had been in the middle of an internal reorganization, and the silence had been about that.
The CEO felt two things when he heard. Relief, and something that surprised him. He was grateful they had run the stress test anyway.
Frequently asked questions
What is a healthy cash runway for a small business?
Under a 20% revenue decline, less than six months of runway indicates a structural vulnerability rather than a normal risk. Most owner-led businesses between $5 million and $50 million should also hold a minimum operating balance of four to six weeks of total cash obligations at all times.
Should available credit count toward runway?
Calculate runway on available cash first, then note available credit separately. Undrawn credit is a real resource, but facility availability can change precisely when you need it, and a fully drawn revolver reads very differently to a lender than a partially drawn one.
How is runway different from burn rate?
Burn rate is monthly net cash consumption. Runway is how long available cash covers that burn. Burn tells you the speed. Runway tells you the distance to the wall.
Call to action
Book a free 30-minute cash flow call with C-Suite Support and we will run your 20% stress test together.
About the author
Paul Whitley is the Founder and CEO of C-Suite Support, a Texas-based fractional executive firm that provides fractional CFO, COO, and CMO services to owner-led businesses across Dallas-Fort Worth, Houston, Austin, and North Texas. Paul Whitley has spent more than thirty years as a CFO, COO, CMO, and general manager for companies ranging from $1.5 million to $5 billion in revenue, and has helped raise more than $336 million in public debt, private equity, bank debt, and asset-backed financing. He is the author of Profitable and Broke: What Your Cash Flow Reveals About Your Leadership and the host of CEO Talks with Paul Whitley on the C-Suite Network.
Related reading
The 13-Week Cash Flow Forecast, Explained. How to build a rolling 13-week cash forecast, and why honest beats accurate.
Your Bank Balance Is Lying to You. The difference between your bank balance and the cash you can actually spend.
