Here are some concrete suggestions to help you manage your cashflow, and lengthen your company’s runway, when times get tough. In some ways, times are tough right now. In some ways things are looking pretty good. But there are enough threats – persistent inflation, geopolitical concerns, declining balance sheets, stock market declines and declining funding – that a smart entrepreneur includes “survival” on their to-do list.
- You’ve got to understand your path to profitability. That is the new mantra of investors, it’s also the new mantra of every company.
- Consider asking your team to take a pay cut for the duration of the crisis – 10%, 20%, 30% depending upon your situation. If you have a vision that is compelling to your team, they will largely stick with you and you’ve just extended your runway. Of course, you’ve already cut your own pay by 50% before you ask! Remember that investors won’t “backpay” so make sure you’re clear that this is “sharing the pain” in order to ensure survival. Of course this is all more compelling if you have a good stock options program.
- Note that if you get into a company threatening crisis, DON’T lay anyone off!!!! Instead, increase the compensation discount until you have some runway. Some people may leave, but you may be surprised at the number who stay, particularly if you are making progress at raising capital or selling the company. I’ve seen a cut for an entire software company down to $10/hour work and keep the team intact!
- I recommend that entrepreneurs have a minimum of 1 year of cash on hand, and where possible, 2 years, which means skinnying up as capital declines. Investors don’t love this, but I’ve seen angels and VCs run for the doors when public equities collapse so the entrepreneur has to put the company and team’s survival as a priority.
- Consider asking all of your vendors for the “New Recession Discount” as well – particularly if you are a regular, loyal customer. Customer switching your business from a big, impersonal business to a smaller, more agile, highly motivated, local business willing to offer that discount. That includes your landlord, who is probably overcharging you compared to what new tenants will be willing to pay. This includes your attorney and your accountant!
- Weirdly, consider offering your customers the “New Recession Discount” to cement goodwill. Be candid that these are becoming tough times, offer a discount, and ask what else your company can do to help your customers. You will likely be surprised that very few companies are doing this for their customers. Put yourself in that special category of “extraordinary” vendor.
- Get to profitability – FAST. This may seem to contradict the point above, but – if you’ve underpriced your product or service, fix that! I know, some customers may leave, but don’t try and make it up in the volume. Walmart has been infamous for saying to small vendors, sell to us at or below cost, and then everyone else will want your product, and you can make up the profits with them. NO NO NO. And consider small annual increases as your pricing strategy, like 2% or 3%. Tech in particular has a history of dropping prices, but maybe that doesn’t make sense. And most other businesses should increase by small regular increments rather than hitting customers hard. One vendor tripled our bill overnight – I dumped them fast. They claimed it was worth it, but such a big increase seemed usurious. They went from decent revenue to zero. On the other hand, a small increase would have been fine.
- I recommend that entrepreneurs “Design the Perfect Investor™” – that is to only approach super targeted “perfect” investors and never waste time on local investors or big names, unless they are also Perfect Investors. A Perfect Investor is one who is WAITING for the vision that you offer. It is, in fact, possible to execute this strategy in the real world, and it is effective.