Dealing with a Downturn: How to Prepare for a Dip in the Market

Whether you have a finance team or not, navigating a downturn in the market can take time and effort. So how do you know which parts of your budget to cut and when to cut them? Preparing is key to keeping your head above water during a downturn. If you know your company inside out, then it's easier to predict how to move forward.

Unfortunately, there is no one-size-fits-all solution. So, Hudson Bova, Principal of CFO Services at Pilot, and Shannon Galiotto, Strategic Finance and Business Operations at Pilot, share a few secrets: ways to cut your budget, navigate downsizing, and why you should begin fundraising sooner rather than later. 

Find places to cut spending

When you're looking at your budget, there are two categories you should focus on: what to cut and keep. But how do you know which aspects of your budget are which? Shannon advises that in terms of what you should cut, look at recurring expenses and trim where you can. You can also use a program like Pilot to look over your recurring expenses; even some credit card companies will flag certain expenses for you. This can be very helpful when looking at negotiating subscriptions and other contracts.

If you don't have a tool to examine your costs, look through your bank statements monthly and evaluate where your spending has increased. Shannon suggests that once you've reviewed your expenses, you'll be able to determine if you should cancel or renegotiate your vendor contract.

Finally, make sure to scrutinize your company's spending habits. You'll only be able to successfully cut your budget if you know exactly where you're spending unnecessary money.

Perform a market analysis

If you're trying to stretch your budget, consider raising the prices of your products, keeping in mind that you can only force a price raise on some products. Hudson warns that it's more complex than raising prices for all your customers because that could adversely affect volumes. Instead, perform a market analysis of your three to five nearest competitors to determine how they're pricing their products in the marketplace.

This will ensure that you price your product at a reasonable price. Inflation is rampant in all areas of business at the moment, so benchmarking your product pricing to market dynamics is something we suggest to all our customers. Price multiplied by quantity is a fundamental equation for sales. So keep your budget on track by pricing your products correctly.

Collect cash upfront

The best way to keep your budget up to scale with your spending is by collecting as much cash upfront from the customer as possible. This is considered unearned revenue, which is money received by a company for a service or product to be delivered later. Hudson suggests that you'll want unearned revenue, another form of implicit financing for your business, rather than accounts receivable.

The difference is that with bookings and unearned revenue, your company is collecting cash up front, whereas accounts receivable provides payment terms to your customers. So if you want to balance the books, then you need to have some money in hand.

Hudson also mentions that businesses and customers are struggling across the board, so closely monitoring collections is critical now. If you can't get enough unearned revenue, alternative forms of financing for accounts receivable and annual recurring revenue provide one-time cash inflows today for future income. These alternative forms of financing can be expensive, but if cash today is an issue in the short term, these are very real and meaningful options for your business.

Manage downsizing carefully

Sometimes, downsizing is inevitable. But be careful how you choose to go about announcing and implementing downsizing. Hudson believes it’s better to downsize deeper on the first pass rather than having multiple downsizing rounds. Multiple downsizing rounds leave employees uncertain about their jobs, significantly impacting morale. This could start a self-fulfilling internal flywheel that might hurt profitability long term.

Instead, Hudson suggests that you should start with cutting unnecessary perks and non-essential contractor engagements. Additionally, pausing founder salaries and even salary reductions for key individuals are viable strategies that act as stopgaps.

There are also optics at play when senior stakeholders take voluntary pay reductions for the sake of the business. Stakeholder voluntary pay reductions show employees and customers that the stakeholders believe in the company's long-term vision and are willing to do whatever it takes to get through a rough patch. If you want your employees to have faith in your company, you must have faith in it yourself.

Begin fundraising sooner

Fundraising is taking a lot longer nowadays, so planning is essential. It would help if you also started fundraising before you think you need to. The rule of thumb for fundraising was to begin the process with six months of runway. That's now extended to approximately 12 months, according to Hudson. There's also a wider variety of forms of fundraising than ever before.

Venture debt, for instance, is increasing across Pilot's customer base. Venture debt does not have the same expected dilution that an equity race has, especially at depressed valuations, but venture debt comes at the cost of free cash flow. In other words, venture debt typically has an interest rate and must be repaid at the end of the term. Nevertheless, we're seeing many founders solicit their existing investor base and ask for venture debt to bridge to a particular milestone or goal.

Businesses with solid margins and free cash flow are most likely to raise venture debt successfully. If your company is in a position where venture debt is your best option, it might be time to explore that avenue. When dealing with a downturn, proactivity is your most important asset. Prepare your company before a market dip, and you'll be able to ride the waves effortlessly. 

Learn more from Hudson and Shannon about cash management during a market downturn in this webinar.