The macro environment in the US is tightening and some are predicting that it could get worse. Board members, once perfectly happy with reports of steadily increasing sales, are now asking companies to cut their cash burns and extend runways as much as possible.
With the economy tightening, start-ups that are planning future funding rounds will no doubt face greater scrutiny and a lowered appetite for risk. It is time to take control within your organization, proactively managing your way through the downturn.
I had the privilege of working as a finance leader/CFO during the last two big economic storms and have come out all-the-wiser, despite a few lingering scars.
In 2000/01, the Internet bubble burst, and as a member of American Express's venture capital group, I had a front row seat to the aftermath. I spent many months working with AmEx’s portfolio companies cutting expenses and finding ways to pivot towards more stable business models. During the 2008/09 Great Recession, I was CFO at OnDeck, and again was faced with the need to manage our way out of a potential financial crisis.
The good news is that I, and my teams, made it through both economic storms and managed to come out the other side stronger and more resilient.
Here’s some guidance on how you can too.
These may sound the same, but they are not.
A great company is one that has great technology, great employees, great investors, and a lot of buzz. Think WeWork in 2018.
A great business, on the other hand, is one that has healthy sustainable margins, strong customer retention, a positive growth trajectory, and tight spend management. This was not WeWork in 2018.
Yes, the great company is definitely the sexier of the two. But in order to survive an economic downturn — or even a full-blown recession — you must be both.
This may seem like an odd question, but it is one worth asking.
A great business means that your operation, at its core, has positive and scalable unit economics. In other words, you make money. After all, giving away a dollar to earn 90 cents certainly isn’t sustainable. Yes, you’ll see impressive growth – along with negative profit margins.
Capital intensity is also important. The more capital-light your business is, the better. Capital intensive businesses may be profitable, but they require so much capital that your Return on Equity suffers.
I often think of Brad Feld, a well-known Venture Capitalist, and his ‘Rule of 40’. This rule states that your annual growth rate plus your operating margin should be above 40. The rule demonstrates how a low, or even negative, operating margin can be offset by a higher growth rate. But it also shows how businesses must be able to increase their operating margins if growth slows or even stops.
Most companies cannot.
Recessions and downturns are scary. There’s tremendous uncertainty - around interest rates, stock market performance, employment trends and investor tolerance for new investments. In terms of managing your company during a downturn, however, focus only on the things you can control.
Controlling your cash means knowing and being able to justify every dollar collected and spent within your organization.
Cash Outflows: Spend management is always important, but during a slowdown it takes on a new urgency. Every expense should be reviewed and questions should be asked, such as: is it justified? Is it priced competitively? Should it be re-negotiated? A firm control over cash gives you control over your burn rate, and this is a crucial step to weathering any economic slowdown.
Reduce Credit Card Usage: In good times, everyone loves using credit and virtual cards. They are convenient, earn points and cash back, and can be assigned to specific individuals and for specific vendors. That said, credit card spend often does not undergo formal review/approval processes, and can lead to excess levels of overspending. A great way to take control back over your cash flows is shift spend away from cards to traditional bill pay processes that require formal approvals and a lot more scrutiny.
Cash Inflows: In terms of revenue, there are a number of important questions you should be asking, including: are you retaining existing customers versus spending more to acquire new ones? Are you identifying at-risk customers and proactively taking steps to retain them? Are you regularly ‘delighting’ your customers as a way to keep them happy and loyal?
Pricing: Often start-ups incorrectly assume that their pricing is final — and perfect — when in fact, it isn’t. Unless it's been iterated on and experimented with, your pricing may be off. In many cases, prices are far less elastic than you’d think, and prices could potentially be increased with little or no effect on demand.
At American Express, I worked under Ken Chenault following 9/11, and his ability to lead the company through one of the most traumatic times in history was inspiring.
Ken always said that his job as a leader was to define reality and give hope. As you work your way through this most recent economic downturn, you can also follow these words and, in doing so, control the narrative within your organization.
When you communicate with staff, shareholders, board members, vendors, and others, be candid, honest and authentic. Identify the challenges you face, explain your plan to overcome them, share why you're excited about the plan, and provide the metrics by which you will measure success.
If you're well capitalized, you could use a downturn to your advantage. Obviously, leaping into high-cost projects with long-term paybacks would not be recommended, but you could identify a few strategic opportunities where you can pull ahead of your competitors.
For example, if your competitors are struggling, you may be able to pick off some high-quality hires. You also may be able to reach out to partners or distributors where your competition has dropped the ball or canceled deals entirely.
Use a slowdown as a chance to double down on the things that are working for you.
As an example, in 2008, OnDeck was competing with the merchant cash advance industry and a number of shady operators were getting leads through the broker channel. The financial crisis resulted in 80% of these operators vanishing. At OnDeck, we stepped up and began providing exceptional service to brokers, such that even when the economy recovered, we remained ‘first look’ for most deals.
Time is your greatest asset. This is especially true in a downturn. When managing through tough times, economize your own time management. Focus on what matters most and learn to say ‘no’ to non-mission-critical meeting requests and business opportunities. And eliminate or automate low-value tasks that may take 3 or 5 minutes each, but add up to cause significant inefficiency and distraction. Whether this be inputting data into your GL system, logging into your bank to pay contractors, or even scheduling meetings, find software tools that can automate these low-value activities. I promise, you’ll see an ROI right away, and your mind will be freed to focus on higher-value activities.
Asking your team to work efficiently without access to quality tools is both frustrating and costly. Pulling together consolidated data can be a days-long process involving cutting and pasting from multiple systems.
On the revenue side, many CRM systems provide excellent analytics and reporting to facilitate customer management.
On the spend side, not so much.
In fact, the lack of AI-powered spend analytics tools was the impetus behind Glean AI’s founding in 2020. Glean AI — so much more than a spend management tool — facilitates collaboration and gives decision-makers access to the information they require to proactively manage expenses and vendors, all at the click of a mouse.
As you face the coming months of uncertainty, remember that it will be control — over cash, narrative, strategy and efficiencies — that will help you navigate through the challenges that lie ahead.
If you are interested in learning more about Glean AI or if you would like to see it in action, please contact firstname.lastname@example.org.