How to manage a company through a downturnFeatured

Are we going to have a soft landing, a hard landing, or no landing? It all depends on what you are reading or who you are listening to as to whether we are in a recession, approaching a recession or will make it through without a recession. With an unknown economic environment, businesses need to be prepared for what may be in front of them to not only survive but to thrive.

I advise a number of companies and the first thing I ask the CEO or business leader is what is your cash runway or what happens if you lose 10% of your customers? We don’t know what is ahead of us so it is important to know your numbers and have a plan.

Know your numbers

I always believe you should have a plan but in uncertain economic conditions, it is imperative to have a plan in case the environment changes unexpectedly. I create at least 3 financial scenarios - best, probable, and worst, and then create plans for each of those scenarios.

For example, if you lose 20% of your business, what expense cuts would have to be made? Will you need to do a layoff? If a social media post goes viral and your business increases 20% what would you need to do to keep up with the demand? Who would you need to hire? The plan should include at a minimum an income statement and cash forecast by month for the next 12 months and preferably 24 months. The forecasts should be reviewed and updated on a regular basis as changes to the business or macroeconomic environment occur.

At the start of Covid I was the CFO of Zapier and our revenue drastically decreased when everything shut down. We didn’t know what was ahead of us so we put in a 7-step cost-cutting plan with revenue milestones. We started with the first 5 steps which were to pause hiring, pause raises, pause bonuses, decrease advertising, and decrease outside services. If revenue decreased more we had two more cuts which included a layoff but thankfully, after a few weeks, we were back to normal. By the end of June, we brought everything back including paying out an additional bonus. It was a scary time but with a plan everyone was less anxious.

Where can you cut costs?

On your worst-case plan, you will most likely need to cut costs so where do you start? I first look and see if there are processes that can be automated with software rather than having people do it. I look at software and services and see if there are any that are not being used or can be put on a company plan for a discount. Next, are business purchases that are made at the best price possible?

I have people come to me to approve purchases and the first thing I ask them is if it is the lowest price we can get. Sometimes it is as easy as just asking if there are any discounts or specials. I had an employee that was buying swag for employees and the hoodie the founder wanted was outside the budget. She was creative and went searching on the internet and found a 20% off coupon and we were able to give out hoodies the founder wanted. :)

Communicating with your team

When the business changes and you have to go to one of your plans, I think it is important to communicate the plan with the entire company. Where possible, be honest and transparent about the situation and let your team know how they can help.

Once we had the Covid plan in place at Zapier, we had a Zoom call with the whole company and went through the 5-step plan and answered any questions people had. We did a weekly update on where we were at our all-hands meetings and were open to questions. Employees were scared they were going to lose their jobs but being transparent helped them feel more comfortable. Employees wanted to help and they searched for ways to save money and they found a lot of savings. When we did our weekly financial update we started including shoutouts to the biggest savers and folks really liked this.

Look for opportunities

Economic uncertainty or a downturn is not necessarily a bad thing. There are a number of companies that have started during a recession. A few are Disney, Trader Joe’s, and Microsoft so it is important to look for opportunities.

What is working in the business and what isn’t? In a downturn, is your product or service more valuable? I have worked at companies during a downturn where our business increased because we were lower cost and acquired a number of new customers that moved from the enterprise players to us to save money.

I was at MailChimp during the financial crisis in 2007 and 2008. The majority of our customers were small businesses and a lot of them were struggling during this time. To help our customers and to help prevent too many of our customers from leaving due to cost, we increased the size of our free plan. This in effect was lowering prices and allowed more users to be able to use our free plan instead of having to leave if they couldn’t afford it. We looked at the lost revenue as a marketing cost and we made sure we were comfortable with revenue loss before doing it. With a free plan, you had to have “Powered by MailChimp” at the bottom of your email so millions of people could see this. It was great brand marketing, customers loved that we helped them out during a rough time, and many customers stayed with us and paid even more once their business was doing better. It was a huge success and we did it again in 2009 and 2010 and I believe it was one of the things that made MailChimp so successful.

Managing through a downturn or recession can be tough but if you are prepared, the business can make it through and emerge stronger.

Excellent piece, Jenny! Particularly loved your personal stories at Zapier and MailChimp. How do you decide the metrics and numbers in your best / worst / probable scenarios?
Thanks, Iynna. Great question! Every situation is different. For MailChimp and Zapier, losing or gaining 5,000 customers does nothing to the business but for most companies that would turn everything upside down.For my base case, I look at what has happened in the past, what changes in the products will be happening over the next 12 - 18 months, and what the competitive, economic and environmental landscape looks like. From this, I come up with an estimate for revenue, expenses, and cash forecast if things go as planned.I then look at what would happen if one of my assumptions became a worst-case scenario. For example what if a new competitor came in? What if you thought AI wouldn't affect your product for several years but a new product came out that made your product obsolete? What if the marketing campaigns did not do well? I then adjust the base case to create a worst-case scenario with the new estimates for revenue, expenses and cash flow. On the other end. What if a celebrity starts using and talking about your product, you have a video that goes viral, and your new features or new product are much more in demand than you expected? Some of these are unexpected but for this plan, you would look at the marketing plan, sales initiatives, and product changes and think about what some possibilities are if things went better than expected. Again, I take the base case and adjust it with new estimates for revenue, expenses, and cash flow to come up with my best-case plan.These adjustments may be +/-10-20% or 50%+/- from the base case. To determine the % change, you need to think about what would have to happen to your business to make a radical change. For example, how much of a revenue drop would cause you to do a layoff, or how much of an increase would cause you to hire? Hope this helps!