Managing Through a Downturn: Lessons Ahead of Uncertainty

2000. 2008. 2020. 2022.

The last twenty two years have seen their fair share of crises in the financial markets. With the pandemic a very recent memory (and still ongoing in many places), uncertainty is back in the foreground for many. Inflation in double figures, energy prices have rocketed and an official bear market in the public markets.

Not an easy time to be running a high growth company for finance leaders.

So based on conversations I’ve had with other finance leaders, this article includes specific advice to help with:

• Managing burn

• Empowering the team

• Using data

• Opportunity hunting

• Managing investors

About Philip

I’m the Co-Founder and CEO at tranch. Our mission is to bring payment flexibility to businesses. We embed with software and service providers to offer a “Pay with tranch” option. This lets their customers spread annual licenses, annual fees and other contracts over 3 to 12 months, to focus on their growth. 

Our software and service partners can collect cash upfront and close more annual contracts. Previously I was the CFO at a late stage startup during the pandemic.

Here are some of the key themes for finance leaders to consider as they face into the new period of uncertainty.

1. Managing burn

Burn is all the rage. That is, managing it and looking to move from burn to profitability. For some companies, this isn’t possible in the immediate term, especially at the beginning of a company’s lifecycle in the venture capital sphere. So what can you do?

The key is to focus on what is in your control. There are multiple levers your business can pull depending on the severity of your current situation and uncertainty of future ability to raise capital. 

Making a plan is a good start, and this depends on your situation: cockroach mode vs trimming. Either way, knowing where your cash goes monthly at the most granular level is the starting point. From a cost perspective it may look like:

Part 1: re-negotiate rent; reduce unused software; extend payment terms

Part 2: speak to HMRC (or the IRS) on delayed payments for VAT and PAYE

Part 3: examine headcount

Then there are also the income levers:

• How do I collect revenue upfront from more customers

• How do I speed up my pipeline

• Can I reclaim outstanding R&D rebates (or finance a claim)

• Can I pay on different terms for future payables?

If you run finance for a SaaS company, look at the Burn Multiple (coined by David Sacks): Burn Multiple = Net Burn / Net New ARR

This multiple puts the focus on how much you burn to generate incremental ARR. If you’re over 3x on this multiple, skip to Part 3 of the cost plan.

2. Empowering the team

It’s often a mistake for management to carry the entire burden of steering a company through anxiety. Many companies have proven that involving all staff in the existential survival of a company can lead to creativity, new revenue initiatives and, if necessary, voluntary salary reductions to avoid reducing headcount. 

One way to get buy-in to the company’s mission is to share the data (we will come to that next). Often leaders hide the truth - i.e. the cash balance and runway - from their staff to not “scare them.” They miss a trick here, as the team can help finance solve the problem - but first they need the facts.

Not everything can be solved in a hackathon, but there’s always scope to improve transparency in an organisation, especially when times are tough.

3. Using the data

Data and decision making go hand in hand. If your business, and the team, doesn’t understand the most important metrics in the business, it’s time to change that. Key metrics, key targets, unit economics, and how you influence unit economics are all important. 

Everyone in the business should see these daily or weekly and know how their role can influence.

Finance leaders are lucky. They get to work with all business units to understand how each department influences another. The interaction between cost of acquisition and cost of sale was a big one for me at my last business.

There are great BI tools out there to be able to send out automated reports to team members. However, the simplest form is to get on an all-hands. Explain the metrics, the why and share why you’ll be sharing them.

For you as a finance leader, taking a step back from the data enables you to also prioritise investment. But more importantly, deprioritize areas which take management bandwidth but without a clear return on investment thesis. Focus is everything in a time of uncertainty.

4. Opportunity hunting

In uncertainty, opportunities are everywhere. Many of today’s leading companies were founded in a downturn (Airbnb and Stripe are just two). Opportunities come in a number of forms, from mergers & acquisitions (M&A) to new marketing strategies.

Starting with new marketing strategies, the key is to understand what your customers are going through. Has anything changed for them? What is their outlook? How can you support them? Understanding your existing customer base can help you translate that into new marketing messages for the wider market you want to grow into. 

At my last company, the pandemic was slowing down mortgage approvals in the market. We diverted our attention to having the fastest approval times in the market so we could provide our customers certainty.

M&A can sometimes feel like the wrong strategy. Isn’t that what bigger companies do? Whilst it can be complex aligning multiple stakeholders, merging two companies in a similar space is very common in an uncertain economic environment. In fact, consolidation is greater in a recession. 

If you are in a difficult cash position, be careful how you portray your company. Some more aggressive companies may decide they’d rather pick you from administration or a fire sale and therefore use this time to learn as much about the company and take a risk on other potential bidders. Seller beware!

5. Managing investors

Sometimes the most difficult part of a finance leader's role is to speak truth to power! Often this means boards and investors. Whilst the temptation is to take an entrepreneurial “glass half full” perspective, sharing the hard facts and the company's mitigants is much more prudent. 

You want each Board director to feel empowered to make a decision in the company’s best interests. These can be among the most important and difficult decisions you can face (trust me, I know!). But this is where your role comes into its own!

Be sure not to add too much bias, but work with your management team to produce scenarios that reflect the knowledge and data you have to hand. Do remember, however, that new equity investment isn’t the only option in a world of alternative financing. There’s also venture debt, revenue financing, R&D financing, and what we do in tranch around expense financing.

Finally, if you are running an investor approach - be wary how long it will take and use your existing investor’s commitment to your company to your advantage. Just like your team, empower your investors to support you!

Conclusion

Times aren’t easy right now for finance leaders, but us scaleup folk have to love it. It’s not all doom and gloom, there are plenty of things to do in your business that can improve efficiency, increase team morale and set up your company for success.

Every day is day 1.