Survival of the Fittest - A Realists Guide to Navigating Downturn

Posted by Nick Christou on Mar 24, 2020 9:50:20 PM

Running a small or mid-sized company is like driving a Zodiac inflatable boat from California to Hawaii…in the middle of the night. With only a flashlight to guide you, anxiety can creep up on you in an instant and it can be hard to tell what direction you’re headed, especially as the waves get bigger and bigger.

Our current business environment is challenging. Countries around the globe are opting to apply sanctions to businesses in an effort to protect public health during the current pandemic. Revenue has significantly slowed, or in some cases, come to a screeching halt, while access to capital remains limited and promised government stimulus packages are yet to be approved. Here are 6 things your business should consider to navigate these waves of uncertainty.

Need vs. Want

“Watch the little things, a small leak will sink a great ship.” -Benjamin Franklin

Our brains are wired to look for efficiencies, not necessarily effectiveness. In good times, we look for ways to outsource tasks and purchase products that we think will make our life better. Unfortunately, these increases in personal productivity come with a cost and unless they are directly revenue generating, now is the time to evaluate their effectiveness and impact to the bottom line.

Look at your habits and spending, both personal and professional, and evaluate what can be done away with. The added benefit of doing this is the short-term suffering of taking on manual work hardens the spirit and will prepare you for potentially more challenging situations to come.

Become Married to Your Income Statement, Balance Sheet and Statement of Cashflows Immediately

If you don’t know what those three things are, hitting google and looking them up is buying the engagement ring. Asking for help from a trusted advisor is the proposal. Becoming lock step with your financial ebbs and flows, is the first dance at your wedding.

What’s critical here is understanding how much cash you have now, where it comes from and how often, and where it’s going and when. Like a 90’s car racing video game, getting through the next checkpoint before time runs out is the key to surviving. The amount of access you have to capital on an ongoing basis is the amount of time you have left.

Know Who Your Customers Are, Their Purchasing Habits and Utilization Habits

You may think you know your “ideal customer profile” and your current customer like the back of your hand. You and your team have done countless hours of research, customer calls for feedback and read the negative yelp reviews until you had them memorized. While that is a great baseline and in “normal” times would help drive the direction of the company, it is not a north star during times of crisis.

Cadence is critical here. Knowing how often your customer repurchases (or their purchasing cycle if it is a one time purchase) will allow you to plan for expected rebuys and your business cashflow cadence. If you have access to user data, tracking how often people are engaging with your widget (application, website, ecommerce shop, etc) both before and after the crisis began will allow you to get ahead of potential subscription cancellations.

Categorize clients into groups: definitely staying, probably staying, I don’t know, probably not staying, and definitely not staying. Add up your current client count and revenue for each group to assess your best, middle and worst-case scenarios. (Let’s call this our client risk matrix)

People will buy services and cancel services based on fear. Fear that they may lose their job and not be able to afford paying rent, so your product is off their list. Fear that they might get sick and not be able to use your product for a long time. Fear that they might not be able to go outside for a while so they’ll put your subscription on “pause” until this is over.

Now, start talking to your customers and do what you do best – be there for them and help them. Don’t be afraid to get outside of your comfort zone and tailor your offering to meet the times. A great example of this is brick and mortar gyms who have pivoted to using conference lines to run group classes to stay social and stay healthy. Members are paying less, but they are able to serve way more people at a time thus making it a benefit to the member, and a win for the gym. If your company is completely shut down and that doesn't work, now is  a great time to ask your customers to leave reviews on Google, Yelp and other sites so that your business gets off to a quick start when stores open again. 

Get creative and remember, if your ideas to stay relevant are uncomfortable because “it’s not how you’ve always done it” then good, these are not normal times, it should feel different.

Look At Your Big Expenses Both Fixed and Variable

Separate expenses into two categories – fixed costs and variable costs. Fixed costs are those that are not moveable as you sell additional items, variable are incremental depending on how many items you sell.

Fixed cost = rent

Variable cost = the paper cup I used to sell one cup of coffee

Now divide each expense category by total revenue and total expenses separately. Look at what expenses are the biggest percentage for both categories and look for outliers. In our company, anything that is greater than 3% of revenue and 6% of expenses gets looked at first.

Refer back to the client matrix you created above and associate the portions of your fixed cost each client utilizes and what the variable costs to deliver services to them are. Now compare that amount to the amount that they currently pay and what category you placed them in (definitely staying through definitely leaving).  Do you have a different outlook on who your most important clients to keep are?

Our minds have a tendency to get very basic during crisis times because the root part of our brain focuses on two emotions – hope and fear. I have $10,000 in the bank account and $30,000 in credit card debt therefore I am at -$20,000 and all my clients will leave me and I will go out of business and I am a massive failure and this is hopeless and so on.

By breaking down revenue and expenses by client and category, we are able to add some layers of complexity that bring confidence to our decision making. Losing clients may actually free up an owner’s time to go find better customers, or reduce overhead to a point that the model becomes cash positive.

Negotiate – With Customers, With Vendors, With Yourself

If you would identify yourself as an introvert or someone who doesn’t like conflict, I warn you this step is not going to be fun. Now is the time to pick up the phone and call. Start with your vendors and see where they are willing to support you to keep you in business – landlords, linen providers, phone providers, down the list.

Write down a script and practice it in front of a mirror until you feel confident you can recite it without stumbling. If you don’t know what to say, here’s an example:

“As you are well aware, we have all been impacted by the downturn, both personally and professionally. I’m reaching out to you because we appreciate the business relationship we’ve had with your company and are looking for creative ways we can continue to work with you through this challenging time but we need help.

[Insert your ask here].

Are you open to considering my proposal for continuing to work together?”

Now put yourself in the vendor’s shoes, if one of your clients came to you with this proposal, would you try and find a way to work with them? Also keep in mind that if a client proposes options to you, there are more options on the table than Yes or No (remember that root brain? It’s good at tricking you into thinking you only have two options). Take a breath, get creative and if you need time, let your client know you need some time to think and get back to them. Don’t rush to agree to things that may lead to negative outcomes down the road.

Lastly, negotiate with yourself. This is an exhausting time and it’s easy to beat yourself up for making mistakes along the way. Cut yourself some slack, but also, push yourself to do things outside of your comfort zone for the sake of your company’s survival and success. Don’t give up.

Double Down on Your Strengths

The reason you went into business in the first place is because you had a unique set of skills and offering that was and is valuable to people! A lot of things probably feel like they’re going wrong right now and it’s very easy to want to fix or fight each of them. Many times, the first things that fail during downturn are the weakest parts of the company, product or supply chain responsible for delivering our service.

Typically these are weak because they either didn’t get the attention they deserved or someone on your team didn’t have the expertise needed. By trying to tackle these problems, you are distracting yourself by trying to solve for things you are most likely weak at. This is the recipe for slow, painful, financial death – fighting for marginal improvements in broken processes validated by minimal revenue lift that gives you the false sense of “if I just work harder at this I can outrun the problem”.

You are going to have to work hard. Harder than you have ever worked in your life, but now is not the time to work on making your weaknesses marginally better. Double down on what you can be world class at; the thing that no one in your category can compete with you on, become maniacally focused on stabilizing your new normal work environment and hire to solve for your weaknesses with people that are world class at those items. As people get laid off, you will find that there are amazingly talented people that are scared of what the future may or may not hold, and are looking to work with someone who appreciates their talents. Look for those people and give them the chance to soar.

Lastly, you’re not alone. Everyone is in a similar boat and many are just waiting to see who talks first. No one has navigated this specific incidence, and everyone is operating with the resources available to them. Take calculated risks, place your bets, and be ready to bounce around as wave after wave crashes over the bow of your boat.

“If the art of war were nothing but the art of avoiding risks, glory would become the prey of mediocre minds…I have made all the calculations, fate will do the rest.” -Napoleon Bonaparte

Topics: business strategy, small business, financial reporting

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