Financial downturns are, unfortunately, inevitable. The good news is that previous financial downturns have provided lessons on how to whether incoming financial storms.

Below, we have gathered some tips on how to manage your finances during potentially challenging times and we hope they are helpful to you and your business.

There is no secret sauce to emerging as a stronger company on the other side of a downturn or recession but planning in advance surely helps and hopefully the tips below do too.

1. UNDERSTAND HOW MUCH CASH YOU’RE LOSING EACH MONTH (I.E. BURN RATE)

It is critical to monitor your cash burn and spending, because it gives you an indication of your expected runway (i.e. the number of months or years you can continue to operate with your existing cash balance). If you’re not burning cash, be sensitive to how things can change and whether burning cash is a future possibility.

Ensure that your books are in order and run cashflow reports to determine your monthly cash burn. Monitor this metric like a hawk or things can get out of hand quickly.

Cash is the lifeblood of every business and ensuring you have ample runway is your priority during a downturn.

If your books are not in order, reach out to us.

2. REVIEW YOUR EXPENSES TO DETERMINE COST CUTTING MEASURES

A good first step would be to review three to six months of historical financial statements to determine which expenses can be trimmed or renegotiated.

Some costs, such as fixed costs, may be harder to reduce or renegotiate. Fixed costs may include rent/leases, web hosting, some software subscriptions and insurance premiums.

Variable costs, which are dependent on the volume of goods and services produced by the business may be easier to cut and/or renegotiate. Variable costs may include sales and marketing expenses, salaries, travel, meals and entertainment, shipping/freight, overseas supplier expenses and experimental expenses (R&D).

3. DON’T BE SO QUICK TO CUT COSTS

Instincts may kick in and you may jump to cut as many costs as possible in order to bring down spending. Before doing that, consider increasing prices or upselling to existing customers to build in a buffer without cutting costs.

There are expenses incurred that are value-driven and are required for the company to operate - ensure you have a good handle on what these are before you start to cut expenses.

4. REDUCE PAYROLL WITHOUT REDUCING HEADCOUNT

It’s no secret that headcount is usually the most significant company expense. Cutting headcount should be something that is acted upon as a last resort.

In lieu of cutting headcount, try to trim additional expenses related to compensation but not related to direct salaries (benefits, swag, other company benefits/perks like travel, meals and retreats).

Some companies will prefer to keep the same benefits/perks (to keep talent happy) and reduce headcount instead - it’s a case-by-case decision.

5. CREATE A THOROUGH FINANCIAL FORECAST

Using historical figures and best guess estimates, create a there year financial forecast to understand your estimated monthly burn rate and runway. You can even create various financial forecasts to reflect various scenarios (Most Likely, Best Case, Worst Case).

Ensure to create a hiring plan and plug that into your forecast since payroll is always a significant expense. This financial forecast and your actual month-to-month figures will work hand in hand in helping you monitor the company and keep a pulse on the business. The financial forecast should be constantly updated to reflect new information.

6. ANALYZE HEADCOUNT

As a measure of last resort, sometimes, headcount does need to be reduced. Analyzing your company’s people and making decisions on reducing headcount is extremely challenging and emotional - but to ensure the viability of your business - it sometimes has to be done.

As a good first step, analyze roles that aren’t critical or core to the company’s growth and/or survival. Additionally, analyze roles where duplication exists and determine whether roles can be amalgamated.

The economy can take a turn for the best just as quickly as it took a turn for the worst - and team members that are cut may be able to rejoin your company at a future date. Ensure to keep in touch with them and let them know that the opportunity to rejoin may exist.

7. KEEP AN ONGOING PULSE OF THE COMPANY

Keep an ongoing pulse and monitor your financial forecast, revenue/expenses and headcount. If you or your team are able to, create KPIs and data points (dashboards) where management can review and act quickly. The more readily available, real-time and transparent your financial information is, the better the decisions will be.

FINAL THOUGHTS

Being prepared and having a plan where decisive actions are taken can help you weather a financial downturn. The key to having a plan and available metrics to make decisions from is to have your accounting and bookkeeping records in order, otherwise making decisions becomes infinitely more difficult. With financial information at your fingertips, the ability to survive and come out as a stronger company is within reach.

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