The number one reason startups die is that they run out of cash. This is well known; and plenty of resources currently offer excellent advice for surviving turbulent times. But this is scary stuff with existential consequences for small-scale businesses; and guidance around cash-preservation can be overwhelming for company leaders. Having experienced challenging environments in 2001 and (even more so) 2008, I remember making the mistake of being trapped for days in forecast models or repeatedly scouring a laundry-list of line-items to be considered for cost-cutting. I was mired in the tactical weeds and later came to appreciate that some broader perspective would have helped guide my approach. The purpose of this post is to share a few lessons learned on this front and to offer some high-level frameworks to inform the thought process behind cash-conservation efforts.
I. Secondary Goals / Sacred Cows: Leaders intuitively understand the goal of cash-retention initiatives — to survive. It’s quite simple; just don’t run out of cash. But it is never that simple; and that is why it’s helpful for leadership teams to clearly set secondary goals for any expense-management initiative. This approach answers the question, “what is the NEXT most important objective of this effort (beyond simply staying solvent)?” For some companies, that may be safeguarding the customer experience and brand loyalty. For others, it could be maintaining the engagement / continuity of the entire team or retaining top talent. For more mature businesses, it might mean ensuring the business is positioned optimally for whenever the economy eventually turns around. Another way to arrive at similar clarity is by identifying “sacred cows” — those parts of the business where compromises will never be made. Whichever route is taken, this exercise helps leaders keep one eye — even in a crisis moment — on what is important for the longer-term health of the business.
II. If / Then / Then-by-When: The purpose of this mnemonic is to help leaders rise above the detail of expense-management and think beyond the tyranny of spreadsheets. It forces execs to go through a three-step business planning process, as follows:
In sum, this framework forces structure in what can otherwise become an ad hoc reaction to environmental challenges. It demands that company leaders a) thoughtfully envision potential scenarios, b) identify the qualitative and quantitative impact of those environmental forces on their business, and c) codify the steps and related timelines needed to address the challenge faced.
III. Assumptions, Decisions, and Control: Re-forecasts are inherently unsettling; and it can be difficult to know where to begin. One way to get a foothold is to separate where to make “assumptions” and where to make “decisions.” A general rule of thumb is to make assumptions about the top-line (sales / bookings and corresponding revenue) and make decisions around expense management. Why?
The truth is that companies ultimately cannot control whether clients actually buy from them; so, they need to make educated assumptions about customers’ buying behavior. Further, we’ve found it helpful to first focus on (and make the most pessimistic assumptions about) the types of revenues that companies least control. This generally means new sales to new customers, since they are the most speculative and rely most on customers making a proactive and incremental outlay of cash. Then, we move methodically down the risk ladder. The next most at-risk revenue class tends to be expansion sales to existing customers. Then come usage-related revenues. Finally, existing client renewals tend to be the most secure (but still ultimately at-risk!). When companies have great data, they can even further refine their renewal assumptions based on cohorts (products used, type or size of customer, and date of initial purchase). Breaking revenue streams out in this way allows companies to thoughtfully and granularly quantify risk to the top-line.
When (and only when) a company updates its top-line expectations, they can then begin to make informed decisions about expense-management — because they ultimately control expenses and can manage them accordingly. It’s helpful to sequence expense related decision-making opposite to that on the revenue side. Start with the expenses over which the company has the MOST near-term control and work the other way. This is because controllable costs offer the best ability to quickly aid in cash conservation. Highly controllable costs are almost always discretionary / un-committed, non-personnel expenses (e.g. marketing campaigns). Month-by-month subscriptions tend to come next. Consultants and contractors are also somewhat manageable (albeit not nearly as easy to pare back). Drastic measures such as “reductions in force” are far trickier still; and long-term leases (e.g. rent and pre-paid annual contracts) are often most challenging to derive savings from in the short-term. The following graphic from an excellent recent study by A&M (Alvarez and Marsal) concisely captures these dynamics and expands well-beyond.
A note about the elephant in the room: By far the most excruciating expense-related decisions revolve around personnel costs of the core team. Unfortunately, this is also the richest vein to mine from an expense management standpoint, because the majority of expenses in SaaS businesses are people related (yet again proving the adage that nothing valuable is ever easy). Moreover, the dynamics of personnel decisions are deeply complex and interdependent both financially and culturally; and leaders need to make choices in this area with the utmost consideration and care. This topic certainly warrants a more complete discussion but is not the focus of this particular post.
Okay, so…with these frameworks in the toolbox…what comes next? As is often the case when it comes to operational execution, it starts with communication. A range of diverse stakeholders will be involved in, and impacted by, any of the activities described above; so clear, effective communication is key. Although these decisions are made based on data and reason, their communication demands empathy and compassion — none of us wants to be the leader who gets stuck in spreadsheets(!). In a world where working at a physical distance is not just a choice, but a necessary health condition, such compassionate communications are more important ever.