How to navigate your business during an economic downturn

July 7, 2022
How to navigate your business during an economic downturn

Supply chain disruptions, the threat of a gas squeeze, and higher interest rates mean that we may enter a recession. There is no official definition of recession, but there is general recognition that the term refers to a period of continued decline in economic activity.

Recessions have occurred several times in recent history: from the Oil Price Shock in the mid 1970s to the Dotcom Bubble in the early 2000s and the Global Financial Crisis of 2008. While the outlook is dire, past recessions allow us to draw lessons on how to navigate choppy waters.

We built Airbank to help businesses succeed, no matter if one is riding into the sunset, or weathering a storm. In this article, we share our best tips and tricks to navigate the storm and set your business up for success after the turbulent times.

Step 1: Check your financial health

Being prepared starts by understanding your financial health. We must recognize the changing environment and shift our mindset to respond with intention rather than regret. While this is not a time to panic, it is the time to think critically about how companies can prepare for a downturn to come out stronger when the economy corrects itself.

History tells us to hope for the best and prepare for the worst. Understanding your financial health sets the tone for the next 12-24 months. The question here is: assuming no growth, can you survive?

If you are a venture-backed tech company

Startups fund their operations heavily through external financing and their unit sales are rarely cash-positive. Hence, in the current market conditions where access to new financing is hard, these venture-backed companies need to conserve their spending for as long as possible. Two key indicators stand out:

Monthly burn rate: This is the amount of cash a company spends every month, averaged out across one or multiple months.

Monthly burn rate = (Starting Cash Position – Ending Cash Position) / # Months.

Runway: This is the number of months left from today until the company hits a balance of zero and turns insolvent.

Monthly runway = Current balance / Burn rate

If you are a traditionally funded company

The vast majority of companies are funded by its operations given their sustainable business models. External financing is usually drawn by the banks which diligence a company closely for their ability to stay cash-positive. For these companies, another core indicator is top priority:

Free cash flow: This is the amount of new excess cash available after every month, generated by the business' operations. In current market conditions, companies must make sure that their free cash flow is always positive, growing, and does not turn into cash burn.

Free cash flow = Starting Cash Position – Ending Cash Position

To calculate these KPIs, finance professionals need to enter all bank transactions in a spreadsheet or finance management tool. To avoid a manual entry connect the bank accounts for a real-time and accurate burn rate.

Step 2: Set your business up for success

What works in any market condition is consistent growth and disciplined financial management that leads to better margins. If your business is currently not in good financial health, you need to adapt, cut costs, preserve cash and become lean. There are a few ways we can think of to do this. Based on our experience in working with thousands of startups and small businesses, the following initiatives are particularly effective:

Critically analyze software spend

Almost certainly, there will be subscriptions on the bank accounts, which companies are paying for that are not used nor needed. Fix this by highlighting all your recurring subscriptions and identify cost savings potential. The easiest way to do it is by using a SaaS tool for that.

Check for unnecessary overhead expenses

Sometimes there might not be a need to get yet another delivery of stationary, or spend on non-essential activities. Small line items often disappear in the P&L, but those costs add up quickly. To avoid unnecessary overhead expenses, companies need to critically scan through their largest counter-parties and assess if those overheads are mission-critical to the business.

Re-negotiate with key vendors

When did you last renegotiate contracts with your largest suppliers and vendors?

Recessions are sometimes a good time to ask for better terms, bulk discounts and re-negotiate contracts. When considering to switch to a less expensive vendor, make sure to not forget the change process needed for the people affected by the change.

Automate where possible

This can apply to anything from accounting tasks to using a CRM system. Automation is a straight route to time and money reductions, so make sure to cross-check our recommendations here against your current processes.

Increase your prices and optimize payment terms

Current markets require companies to adjust pricing. What is long accepted in the supermarket and at the gas station, also applies to other industries. You can address this on two levers.

Switch to upfront payments: It’s tough to know if customers would accept to pay upfront, but if they are large companies (in counter-cyclical sectors) they may be open to hear you out. The right combination of discounts and account management helps to build a cash reserve.

Increase prices: Price levels need to rise according to the markets ability to pay and cost of operations. As supply chain costs and FTE costs increase, so does the top line in order to keep Free Cash Flow metrics healthy

Be carefully aggressive in the marketplace

Actively look for new business, and maybe add a salesperson or an added service to gain an advantage over competitors.

On the plus side, hiring becomes easier in a slowdown because more candidates become available to you due to cutbacks.

Face your customers

When sales are slow, maintaining contact with customers becomes more important to fight off competitors. Meeting your clients face-to-face enables a great opportunity to calm unhappy customers and gain back lost ones.

Try to win long-term deals with your most valuable clients. Offer them prepayment incentives and discounts on long-term commitments.

To summarize:

  1. Critically analyze your software spend
  2. Check for unnecessary overhead expenses
  3. Re-negotiate with key vendors
  4. Automate where possible
  5. Increase your prices and optimize payment terms
  6. Be carefully aggressive in the marketplace
  7. Face your customers

Step 3: Plan for multiple scenarios

Taking things a step further, monitor your cash flow very closely, and forecast it monthly. Make sure your financial statements are timely and accurate. Pro tip: Cash flow statements are better than income statements because they reflect the actual cash position rather than the accounting view and they are always available in real-time.

If you have fewer than 24 months of cash left, you need to act fast. No one knows what will happen, so big companies forecast many scenarios, which is also what we believe you should do. Create three (or four) plans with differing cost and growth assumptions. Review them with your team to confirm the next steps.

Step 4: Stay ahead

While economic slowdowns make it difficult for businesses who are trying to survive and grow, it is not self-evident that companies have to slash revenues and decrease market share. That concept hits business owners that take too long to realize what should be done, or who resist change.

How does Airbank fit in?

🏠 Consolidate all your bank accounts for a bird's eye view

🔎 Get real-time metrics to know your cash position

🕵️ Automated accounting saves you time and money

🎢 Better forecasting automatically syncs your actuals with the forecast

Resourceful leaders see the available opportunity, and take necessary measures today to lay the groundwork for tomorrow's success.

"Look at this as a time of opportunity. You play your cards right and you will come out as a strong entity."

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