In Uncertain Times, Cash is King
If I had to run a company on three measures, those measures would be customer satisfaction, employee satisfaction and “cash flow”. (my…
If I had to run a company on three measures, those measures would be customer satisfaction, employee satisfaction and “cash flow”. (my quotes)
Jack Welch
We are seeing turmoil in the financial markets due to fear and uncertainty. Businesses are experiencing demand reductions and supply constraints from the COVID-19 global outbreak. The cadence of all aspects of our lives (travel, in-person interactions) is being changed whether we are students, educators, workers and/or parents/grandparents.
Even businesses not selling physical products or personal services (i.e. software businesses) will be impacted if they haven’t already been. Sales cycle will lengthen and investment in new products and service will slow down. On March 5th, Sequoia Capital released a memo advising their portfolio company leaders (and all business leaders) to recalibrate all their business plan and budgeting assumptions. Eric Ashman, a former digital media CFO and advisor on helping start-ups pivot to profitability, wrote about the early warning system that companies should pay attention to — specifically changes in the trendlines in their marketing funnels and sales pipelines.
I work with business leaders to help them efficiently scale their venture-backed and privately held companies assisting with business planning, fundraising and other strategic financial problems. I’ve received questions from leaders on how best to adjust their business strategy in the current environment while being both responsible and not reactive.
In uncertain environments, cash and cash flow are key. The key is to extend runway as far as reasonably possible while still growing the business. For companies who have 18 months or fewer of expected cash runway in the bank, here are some thoughts I have to offer.
Key Principles
Follow the Golden Rule: Treat your employees, customers, vendors and investors as you would want to be treated. They are all under pressures and stresses similar to what you are facing. Honor your signed contracts with vendors and with employees with future start dates until you mutually re-negotiate them.
Be More Transparent than Ever with Employees: With social media and 24-hour cable news, there is a tsunami of news and rumors out there increasing anxiety in your employees and their families. Marillyn Hewson, CEO of Lockheed Martin, put it best: “In times of uncertainty, employees crave certainty.” Talk with employees about the state of your business, and any changes to strategy and short term focus. Share any insight from your investors and Board members that is relevant.
Continue or Do More Of
Invest in retaining and growing your existing customers. They have committed to working with you. Brainstorm on how best to provide additional value to customers that has a relatively low cost to you.
Keep paying your vendors on a timely basis. Remember many of them are individuals (contractors and consultants) or small businesses who are also experiencing a cash crunch.
Increase the cadence of business updates to employees. With fewer conversations in hallways, at coffee machines and over lunches, employees are looking to their leaders for information and reassurance. That does not mean you need to have the answer to everything. Just that you are aware of the challenges, open to listening and communicate that you are spending time to address business problems created by COVID-19 and its knock on effects.
Focus on key projects that matter to future business success and are within your control. Improvements in product that matter to customers and elimination of internal “operational debt” are good areas to spend energy on.
Start, Stop or Change
Some of these suggestions will not be popular with your employee base. Implement them after thoughtful internal discussion inviting opposing points of view and with a lot of transparency. And ensure that you lead by example with an equivalent or greater amount of sacrifice being made at the top of organizations compared to the middle and bottom.
Update your monthly cash flow forecast. Spend extra time thinking through your working capital cycles and the timing of large prepayments.
Create added incentives for upfront and rapid payments. Your cost of capital is significant. Try discounts for quick payments and higher prices for payment frequencies that are monthly or quarterly.
Increase the focus on collections, even when you don’t have a bad debt problem. Reduce A/R as a function of days outstanding of billings. This is a low level task in most organizations. Focus more senior attention here.
Delay hiring. Both for new positions and replacing people who have left. Prioritize where to hire. Consider using consultants resources on a part-time basis to reduce cost and increase flexibility.
If you need to let go of people do it once and be humane. Humane means providing adequate (several months not a few weeks) of severance pay and health insurance reimbursement, regardless of employee tenure.
Move all bonus payouts to senior executives to annual. Whenever possible bonuses that measure performance over a longer term are more aligned with value creation for shareholders. And, senior executives are more able to afford a pay deferral.
Adjust the timing of commission payouts to sales people to align with cash receipts from customers. Companies predominantly pay sales commissions upon booking (contract signature) or when sending a bill to a new client. Align interests by linking the commission payout to cash receipt. Alternatively, institute a regular clawback on monthly payouts for valid invoices outstanding past the contractually agreed payment due date.
Draw down any committed but undrawn credit facilities. Don’t wait until your lender chooses to invoke a MAC (material adverse change) clause if that exists in your contract.
Focus your marketing spend even more tightly. It is quite likely you will have lower spend in the near term as events are cancelled or deferred (although sadly you may have prepaid significant amounts for these cancelled events, reducing any cash savings.) For paid marketing, really hone in on customers at the center of your “ideal customer profile” (ICP) bullseye. And focus spend and attention on closing prospects already in your funnel or trialing your product.
COVID-19 has increased uncertainty. Uncertainty leads to a lot of volatility, which we see in the huge downs and ups of the equity markets in recent days. From the perspective of a former CFO, this is the time to control what you can to narrow the potential outcomes of your business. As operators and business leaders (unlike investors) we only have one business bet we can make with our time. It is acceptable to choose short term options that sacrifice potential upside in return for reducing downside risk. There will be another time in the near future to take greater risks.