With the world adjusting to a new normal we’re all left to adapt and prepare for coming out of the age of coronavirus into a society we don’t fully recognize. We’ll never be going back to old ways of life or the old economy, we’ll be walking out slowly into a fragile world in need of repair. This isn’t a story of how to keep your employees safe and healthy, as there is plenty out there on that topic. This is a checklist for preparing your company for the economic downturn that is coming or arguably, here.
Rerun your sales forecast under different scenarios, try a worst, not bad, and best case analysis assuming lower growth rates than in the previous years. Enterprise sales cycles will get longer and slow down a bit while SMB sales numbers will be hit much harder. If you want to get the most accurate ideas and cover all bases, run the scenarios for each segment and business line. Only after this will you get an idea of how much revenue you can expect in an economic down-turn.
This is also the time to get on reps about cleaning up their pipeline and making sure it is accurate. Make sure they land on the less optimistic side with closing opportunities and base calculations on historical data as well.
This can seem like a big undertaking but start by breaking out the fixed expenses vs flexible expenses. Once you have broken out the expenses that are necessary for running the business you can cut the fluff. For example, hosting costs are fixed. Office rent is technically fixed as well however, it might be worth talking to your landlord and negotiating. They may be willing to grant a few concessions to keep you locked in for the long haul. Not all tech stack expenses are fixed, cut any nice-to-have tools that only save employees a small amount of time each week. Ask each department which budget items they can part with while still doing their best job.
If you have questions about how much to cut or how to know when you've cut enough, keep an eye on OpEx as a % of Revenue. Take note of the % at the start of the down-turn and as you track potential drops in revenue, make sure you're maintaining good margins and EBITDA. You'll be able to see these numbers in your financial model and can always adjust along the way.
Everyone's least favorite item is going to be headcount and layoffs. If you cut deep into one department it can create vulnerabilities. Be transparent with employees, cut wide not deep, and remember that how you treat employees in hardship will follow you into the future.
If you’re in need of hiring during this time, monitor your competitors and others in your space. If they are forced to layoff high performers because of their own cash issues, those could be perfect additions to your team.
Use your adjusted growth projections and your newly trimmed expenses to get a better idea of cash flow. Once you understand your runway, you can hire accordingly and decide where to put resources.
Understand what your payback period is and invest in the business around those calculations.
Troy Henikoff of MATH Venture Partners illustrates this point in his video below:
If you assume you have a point in time where you'll run out of cash you can use that point to measure if an investment is worth it. You can use this for a specific marketing channel spend for example. If the payback period is longer than the cash runway, it will not pay off to spend there, but if the return from the spend will come before the end of runway, you might even be able to help extend it.
Metrics give a ton of insight into any business. Decide which metrics are your early indicators of success and monitor them like a newborn baby.
Considering cash is the lifeblood of all businesses, you'll likely want to watch a little closer to the usage metrics or indicators that could lead to churn, which of course will impact cash. Some we'd recommend are sales cycle length, usage of your product, and qualified opportunity creation.
You're likely going to have drop off in any downturn, but it's not all churn is created equal. Expect it, plan for it, make it easy. Yes, we did say to make it easy. Don't take it from us, take it from a true leader in SaaS, Jason Lemkin.
Read the full article here.
When churn increases, lifetime value will likely decrease. This means you'll need to monitor your LTV:CAC ratio to ensure sales and marketing stay efficient. Deep dives here on Lifetime Value and Customer Acquisition Cost. The LTV:CAC ratio to shoot for is 3:1. If your ratio is far away (7:1) you might be spending too little on customer acquisition and leaving money on the table. If your LTV is closer (1:1) you’re likely spending too much or spending it in the wrong channels.
As most people know, borrowing money when you don't need it can be pretty simple, but getting credit when times are tough can be difficult.
Companies can rest easy knowing they have the cash on hand even if they pay interest on it. Revolving bank debt can be problematic as it is often tied to hitting certain metrics, so we recommend drawing down if you're a small business who might be caught in a waiting period when you need cash to stay alive.
Doesn't everyone taking out their credit make it worse as a whole?
Yes, BUT, and this is a big but, that's where the central bank and the federal government come into play. While it's nerve-wracking, they're the powers that be that combat credit flow issues in times of a downturn.
As a small/mid-sized business, drawdown.
There is an obvious common theme to all steps taken and that's because cash is king. Cash is the single most important number for any business.
A few resources that do a great job so far are listed below. This is everchanging of course, keep an eye out for others popping up that aren’t listed.
From LATKA - B2B SaaS Blog:
A downturn is not a death sentence for businesses. Recessions can be great times to start businesses and can breathe new life into a stagnant team if prepared for properly. Prepare, have a Plan A, Plan B, Plan C (and as many more as you need) and be empathetic. We will make it out of the downturn, not unscathed, but we will make it.