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

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Pilot Team
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Published: 
September 1, 2022
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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 isn’t easy. How do you know which parts of your budget to cut and when to cut them? There is no one-size-fits-all solution. But Hudson Bova, Principal of CFO Services at Pilot, and Shannon Gallioto, Strategic Finance and Business Operations at Pilot, have a few secrets up their sleeves.

The key to keeping your head above water during a downturn is by being prepared. If you know your company inside out, then it’s easier to predict how to move forward. Hudson and Shannon share ways to cut your budget, how to 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 what to keep. But how do you know which aspects of your budget are which?

“In terms of what you should cut, you can look at recurring expenses and trim where you can,” Shannon said.

You can use a program like Pilot to look over your recurring expenses, and even some credit card companies will flag certain expenses for you. This can be very helpful when you're looking at subscriptions and other contracts to negotiate.

If you don't have a tool that will examine your expenses for you, you can do it on your own. Look through your bank statements month over month and evaluate where your spending has increased.

“Once you've looked at your expenses, you can cancel or renegotiate your vendor contract,” Shannon said.

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, you may consider raising the prices of your products. But you can’t force a price raise on all products across the board.

“It’s not as simple as raising prices for all of your customers, because that could adversely affect volumes,” Hudson said.

Instead, you should 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 don’t price your product either too high or too low.

“Inflation is rampant in all areas of business at the moment,” Hudson said. “So benchmarking your product pricing to market dynamics is something we're suggesting to all of our customers.”

Price multiplied by quantity is a fundamental equation for sales. 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 that will be delivered later.

“We want to have unearned revenue, which is another form of implicit financing for our business, rather than accounts receivable,” Hudson said.

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

“Businesses and customers are struggling across the board, so closely monitoring collections is critical right now,” Hudson said.

If you can’t get enough unearned revenue, there are also alternative forms of financing for AR and ARR that provides one-time cash inflows today for future revenue. 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.

“We recommend cutting deeper on the first pass rather than having multiple downsizing rounds,” Hudson said.

Multiple downsizes leave employees feeling uncertain about their jobs, which greatly impacts morale. This could start a self-fulfilling internal flywheel that might hurt profitability long term.

Instead, Hudson recommends starting with cutting unnecessary perks and non-essential contractor engagements. Additionally, pausing founder salaries and even salary reductions for certain key individuals are also viable strategies that would act as stopgaps.

“There are also optics at play here where senior stakeholders take voluntary pay reductions for the sake of the business,” Hudson said.

This shows employees and customers that the stakeholders believe in the long-term vision of the company, and they’re willing to do whatever it takes to get through a rough patch. If you want your employees to have faith in your company, you have to have faith in it yourself.

Begin fundraising sooner

Fundraising is taking a lot longer nowadays, so it’s important to plan ahead. You should also start fundraising before you think you need to.

“The rule of thumb for fundraising was to begin the process with six months of runway,” Hudson said. “That's now extended to approximately 12 months.”

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 certain milestone or goal.

“We found that a clear path to profitability or product feature release is the type of story that resonates with investors,” Hudson said.

Typically, businesses that have strong margins and free cash flow are most likely to be successful with raising venture debt. So, if your company is in a position where venture debt is your best option, it might be time to explore that avenue.

When it comes to 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 with ease.

For more information on chasm engagement and dealing with a market downturn, watch our full webinar here.

Suggested Reading

A Former Founder Shares 5 Important Lessons

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

Growth Despite Volatile Markets: Pilot Survey Finds SMB Hiring Growth Despite Downturn

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