Whenever there is growth, most businesses will “bulk up”: build future capacity, experiment with potential new business opportunities, and add overheads. But when there is economic uncertainty, recession, or a shaky economic outlook, slimming down is the order of the day… even when there is still an imperative for growth. What is the best way to preserve cash, generate it, and position the company for the inevitable economic turnaround?
Very often, the immediate call to action is to cut, cut, cut. Or, there is an urgent call to VC partners and other investors: send us more money! ASAP! Both of these are important: reducing the burn rate means more runway, and more investor funds (assuming this is an option) will also increase the runway.
Looking at these challenges from different perspectives will generate different ways to solve the problem. This whitepaper explores these perspectives, then suggests different ways to make the cuts, provides a checklist of different ways to conserve cash, and some strategies to generate it, beyond the existing investor group.
1) Downgrade your expenses: When the economy is good, and cash plentiful, it becomes easy to approve policies and practices that now should be reviewed: Overly generous employee health plans and benefit programs. Free food and snacks on premise, premium travel, and so on.
Another interesting approach: look at your corporate credit card. Over time, the number of subscriptions – and their monthly costs – can become enormous. Are they all currently needed? And for those subscriptions that are based on the number of users (Microsoft Office, Google, Adobe, etc), are you paying for user licenses that are not being used?
2) Slicing: This strategy is to simply mandate that everything is cut by a certain percentage, such as 5-10%. Some of this means receiving “less” for the money spent, some of this means negotiating with suppliers for a better deal, some of it means reducing internal project scope, and some of this means reducing headcount. The rationale for a slicing strategy is that during a period of growth, most areas of the business have developed fat: extra expenses and people who aren’t fully utilized. Mandating a set reduction across the board forces managers to identify this excess, and snip it away.
The downside to Slicing is that it assumes that every manager will make the right decision, for the right reasons. Often, personal biases will creep into the decision-making process, meaning that “friends” and pet projects remain protected.
The advantage of this strategy is that the organization doesn’t lose its overall capability, and that it is easy to reinflate the structure once the economy returns.
There are two variations on this theme: Consider rolling back expenses to a level from X years ago; after all, the company did “just fine” back then. The second variation is the hiring freeze, capital expenditure freeze, and travel freeze.
3) Amputation: This strategy makes the decision that entire initiatives, departments, or operational capabilities will be completely shut down. Usually this decision would be made because it is determined that the particular initiative was speculative or will not be cashflow-positive for a long period of time. There are two types of amputation: Investment amputation, and Expense amputation. In this context, Investments are those specific activities that will generate cash at some point in the future (R&D, salesperson salaries, trade show attendance, etc), while Expenses are those specific activities that do not (Accounting and Admin salaries, Rent, new ERP system, etc.)
And if you haven’t consolidated your real estate or space commitments during COVID, a review at this point would be prudent: is all of your current space really necessary? And if you own your office (or land), what if you sold it? Or did a sale-leaseback?
It is not an either-or between traditional and viral marketing: traditional analysis is a prerequisite to a viral marketing strategy, in that it helps define the baseline on which to build, and ensures that no basics are overlooked.
Amputation works best when the cuts are made to the Expenses, not the Investments.
The advantage of Amputation is that it forces a review and discussion of the efficiency and purpose of every dollar spent: is it an investment? Or an expense? When might we get a return on that investment? And if we are going to amputate, what is the priority of each option?
Very often, the decision to approve an outflow (expenditure or investment) was made at a time when conditions were different. And during the justification, certain promises were made with respect to the impact of the outflow. Deciding on what to amputate often is far easier if you review these initial justifications: is the expense or investment pulling its weight, as promised?
The upside of Amputation is that it can add focus to the organization: we are no longer doing X.
The downside of Amputation can be found in several places: reduced efficiency, lost morale, and sometimes reduced trust in the leadership. Counterpoint: each of these can be managed.
And removing complexity (eg people and approval cycles) can actually increase efficiency.
4) Deferrals: For every cash outlay, and for every potential contract, ask a simple question: what will be the impact if this gets deferred for three months or six months? Sometimes the impact will be huge, but more often than not the difference will be minimal.
When someone says that they need a new laptop now – do they really? Why can’t the present ones be used for a few more months… or even another year? When your insurance agent suggests you move your general liability insurance from $3 million to $5 million: will a deferral of a few months really make a difference? And is it worthwhile to seek a second opinion as to the right amount of insurance you really should have? When your IT consultant suggests a security audit on your systems a year after your last one… this is a judgement call.
On the other hand, when your agency wants to increase your digital marketing budget, and they can prove that the customer acquisition cost is far less than the long term value of the customer… don’t wait – do it. Deferring this last expenditure defers cash coming into the business.
The advantage of Deferrals is that it forces a discussion on the time nature of any cash outlays. It’s not a question of getting a return or not, but when will that return occur. Two other advantages: sometimes an alternative, less expensive solution presents itself. Or, when the potential expense is re-examined 3-6 months later, it no longer is even necessary.
The disadvantage of this strategy is that it may reduce the sense of urgency within an organization. It may also send the wrong message, both internally and to the customer base. “If we really believed in customer service, we would be investing in an online knowledgebase now, rather than waiting for 3 months.”
5) Strategic cuts: Strategic cuts are a slightly different take on the Amputation The idea is to shift cash into activities that are cash generating, and remove them from activities that merely consume.
Their methodologies have depth and are effective. We get exceptional value for every dollar spent.
We're pretty deep into it, but in an hour and half I learned six or seven things that I just didn't know before.
I love your ability to capsulize, then deconstuct an issue just to re-assemble it with specific strategies. That makes YOU unique and valued.