Founders, Extend Your Cash Runway by Taking These Steps Right Now
As COVID-19 increases uncertainty in almost every part of your business, it’s never been more important to reduce your cash burn and extend your runway to between 18 and 24 months. Anything under 18 months is concerning.
At OpenView, we understand that your business’ needs and market position are unique and that you, as founders, are in the best position to guide your business through this downturn. However, we can offer a broad view of the market—and we created this guide for controlling costs, getting to cash-flow positive and extending your runway as quickly as possible.
Decisions to reduce costs aren’t to be made lightly; they should be done with compassion and empathy. We hope this guide helps founders thoughtfully approach these difficult decisions.
3 guiding principles
As you consider your path to sustainable cash flow, keep these three guiding principles in mind:
- Minimize the impact to your employees. They’re on the front lines serving your customers each day. You want them to be able to focus on providing the best product, service and support possible.
- Limit the risk to your business. As uncertainty mounts around supply chains, sales cycles and cash collections, exercise control on what you can. In this case, we’ll focus on cost and cash flow.
- Set yourself up to kickstart growth after the downturn passes. You don’t want cuts to be so draconian that you’re at a disadvantage when normal market dynamics return.
First, cease discretionary expenditures if you haven’t already. You’ve probably already stopped traveling, and you should expect to continue to limit travel even after the quarantine is over.
Flights, trains, hotels and meals all add up as employees travel, and these costs can be saved relatively quickly. It’s not to say that limiting travel won’t have an impact on future revenue, but you’ll be surprised by how much can be done remotely.
And as your customers work through the uncertainty in the market, they likely aren’t looking to demo your software in person right now or even in the next few months. Save that trip for when it can have more impact.
Next, revisit your business contracts. Consider signing a slightly longer contract in order to obtain a discount or push for one to two months free if you sign a new contract today. Your suppliers may be in the same position as you and not able to offer new contracts, but discounts that you receive now can benefit you in both the short-term and the long-term.
Third, if you’re operating in co-working spaces or on short-term leases, consider this time to move fully remote. COVID-19 and social distancing are normalizing working from home and highlighting guides for how to succeed with remote teams. There’s never been a better time to stop paying office rent and transition your employees to working from home.
Finally, limit fringe benefits. You’ll likely want to keep benefits like health insurance and life insurance if possible. These are important to your employees’ larger feelings of safety and are something for which your employees count on you. However, there are fringe benefits that are more discretionary: employee meals, fitness center reimbursement and 401K matching are benefits that you can limit during downturns.
If you need to lower salary costs, consider all of your options. Instead of a layoff or RIF, your employees may be willing to take a furlough, an adjustment in hours or a temporary reduction in pay. Combinations of all of these are possible.
First, freeze hiring and merit increases. It’s easier to not add a candidate and to not increase salaries than is it to lay off an existing employee or ask for wage reductions. Limiting growth in these areas allows your business to maintain its cadence and its institutional knowledge. This ultimately puts you in a better position both in the downturn and as you return to growth.
Furloughs, sometimes called sabbaticals, are temporary leaves of unpaid absence in which an employee does not work. They range in length, but they generally have a predetermined time or specific condition when the employee will return to work. Furloughed employees may retain their benefits, including healthcare benefits, so be clear about impacts to aspects like benefits and eligibility for unemployment benefits.
Similar to a furlough, employers can offer an adjusted work schedule where employees work a reduced number of hours. Frequently, employees work three or four days per week rather than five days. In this case, employees remain actively on the payroll, so they retain their benefits as long as they work enough hours to qualify.
You can ask employees to take a salary reduction for a period of time. The key to temporarily reducing pay is to communicate that you know that it’s a sacrifice but that it allows the business to continue operating without layoffs, and to progressively scale the reduction with seniority.
The executive team should take the largest reduction in pay. Some founders are even offering salary-for-equity swaps where employees can agree to a decrease in salary in exchange for equity in the business.
While furloughs and pay reductions may help you get through a temporary setback from the pandemic, they aren’t permanent solutions and don’t add up to the level of cost savings that may be necessary if we hit a sizable recession. Get serious about building a plan for a reduction in force if and when it becomes necessary.
If you need to consider layoffs, remember a couple of things:
- Act quickly. “The earlier you cut costs, the less you have to cut.” A simple framework to follow is “last in, first out.” Newer employees tend to be less productive and haven’t built up institutional knowledge yet. This framework protects the core DNA of your company and optimizes for people who are most productive right now.
- Don’t do a small layoff. You need to cut more than you think—including employees you consider to be productive. Small layoffs are just as painful as large layoffs, but they don’t provide enough change to meaningfully lengthen the runway.
Both of these actions increase the likelihood that you can make a single action, rather than repeated or a prolonged adjustment that negatively impacts the business for an extended amount of time. Multiple workforce and salary changes distract and demotivate employees, cause leadership questions, and negatively impact your company’s ability to serve customers.
Cash collection optimizations
There are a number of ways to manage your cash-on-hand. First, pay commission on a cash basis. This means that you only pay commission when you receive cash from a deal, not when the deal is booked or when revenue is recognized.
It sounds like a small thing, but you don’t want to hit a cash crunch because you pay out commission on an annual contact when the customer is paying you monthly. This commission structure both normalizes your cash-in and cash-out, and it protects against customers unexpectedly churning.
Next, consider prioritizing longer contracts paid upfront. Booking annual or multi-year contracts allows you to collect cash upfront and then recognize the revenue over time. This both provides an extra cash cushion for your business and adds certainty to your revenue. While these may be hard to come by in the current environment, some customers will be less impacted by the macroeconomic conditions and would be happy to lock in their purchase at a discounted rate.
Lastly, be mindful of cash that you expect to come in that hasn’t hit your accounts yet. Run an Accounts Receivables Aging Analysis each month. This is the single best analysis to understand what customers will actually pay. This report will visualize customer balances by days past due (30, 60 or 90+ days past due).
When cash gets tight, especially because of COVID-19 related business interruptions and the expected economic impact, customers will stretch payment terms. For balances extending past 90 days, be wary of depending on that cash in your runway forecasts and be more willing to write off certain bad debts that you may never collect on.
Actions we don’t recommend
Just as important as what you do in response to a crisis is what you don’t do.
If possible, don’t immediately resort to discounting. We know that you’ll have customers asking for a price reduction during a downturn. It’s better to offer concessions or to defer payments than to offer discounts. Try offering a month for free or offering a longer-term contract at a lower monthly price. Ultimately, the price discounts you offer in a downturn tend to remain long after the crisis passes. Listen to your customers and reduce churn as much as possible, but you’ll be in better shape in the long run if you can do it with concessions rather than discounts.
Second, don’t offer role changes in lieu of salary reductions or layoffs. It may feel like the right thing to do for your employees, but it will compound your problems. This is a time when you will need employees to be more productive. Employees who take role changes tend to be demotivated by what frequently feels like a demotion. During times of downturn and crisis, you can’t have people learning on the job to do a role that doesn’t motivate them.
Takeaways for SaaS founders
During this unprecedented time, you should hope for the best but plan for the worst. We recommend having a “good, bad and ugly” plan on the shelf that’s ready to roll out if necessary. Set pre-established triggers for when to implement one of the shelf plans. Use this time to think through several scenarios for the future so that you aren’t on your heels if the crisis intensifies or prolongs.
Start now by increasing your cash runway to 18–24 months by implementing some or all of the tactics we talked about here:
- Cease discretionary spending
- Revisit your business contracts
- If you’re in a co-working space or on a short-term lease, forgo resigning the lease and transition your team to fully remote
- Limit fringe benefits like employee meals, fitness center reimbursement and retirement plan matches
- Freeze all hiring and merit salary increases
- Consider your options for reducing salary costs. A combination of furlough, adjusted work schedule, salary reduction, layoff and reduction in force may be necessary.
- Pay commission on a cash basis
- Prioritize longer contracts and upfront payments
- Institute Accounts Receivable Aging to better understand your cash position and how it may differ from revenue
Hint: You have to look beyond the website or pricing page.
Gross margin documents the business your product is building, yet it’s often tucked away in a financial update while a medley of product metrics enjoy the spotlight.