Financial Planning
Early in the crisis, I met with my head of operations and finance, Rachel, to map out a financial game plan. It was not a meeting we wanted to have, but we knew that detailing a disaster scenario could end up being a key to survival. The difficult situation wouldn’t avoid us if we buried our heads. The reality was that many companies would have to slim their ranks. While it seemed unthinkable, we had to be realistic about the idea that we might have to let go of some of our team members too. We loved them all, and the idea of any one of them being unemployed during an economic crisis was a tough pill to swallow.
Key point: Create a financial and operational plan going into a crisis. Even if you alter it as you go, it is crucial to take the time to consider all the details when you aren’t in the throes of a recession—or any disaster, for that matter. Having a plan will give you peace of mind and allow you to make better decisions in the future.
Our first planning session focused on the pipeline. Rachel was, as usual, ready to go and waiting for me.
“Hey, Will. Were you able to get any customer updates from Steve?” she asked.
We had agreed that I would talk to our head of client relationships, Steve. He would offer a read on how our clients might be adjusting their budgets and planning based on the mandated work from home situation and economic uncertainties that were beginning to bubble up.
I nodded. “Yep. And I also caught up with Ahmet to hear how the sales pipeline looked.” Ahmet was our head of business development.
“Great. How’s it looking?”
“Steve pointed out that one of our strengths heading into this is that we have a very diverse client set.” We had focused hard on that from a revenue perspective, never wanting any client to be more than about a sixth of our business in case the relationship ended. But we have also made diversity a priority in terms of the industries we support. “We’re lucky on that level,” I said.
At that point, we didn’t know what would happen, but if history offered any insight, it was that some industries would get hit hard and others would come through okay. Some might even thrive as a source of necessary support. By having companies from all different sectors in our portfolio, we had some confidence that we could keep a balance.
Key point: Make sure you have diversity in your client base. That means controlling the percentage of revenue a client comprises, varied deal structures, and a spread across multiple industries. This diversity will help when trouble hits, crisis or otherwise.
“And Ahmet?”
“Ahmet remains—how did he put it?—‘cautiously optimistic.’ He said that the pipeline is still strong. We have several proposals with companies that don’t think they’ll be quite as affected by all of this as others, but he’s sure things will start to slow down as companies begin to feel the ramifications of this pandemic.”
She nodded and began to write. “Did you ask them both for their guess on Scenario Two?”
We had mapped out three financial scenarios:
Scenario One would be a small five percent drop in revenue.
Scenario Two would be a ‘most likely to occur scenario’ with a deeper drop.
Scenario Three would be a worst-case scenario.
Rachel and I would work up our best guesses for the second and third scenarios. Steve and Ahmet would give theirs. Then we’d average them out.
“Yes. Steve said he expects between a fifteen and twenty percent drop in revenue from existing clients. Ahmet thought we could see a forty percent drop in new business. I’m guessing more like twenty percent,” I said.
Rachel thought for a moment. “Okay, with my twenty-five percent estimate, we’re looking at a projected,” she paused and checked her math on the calculator, “twenty-six percent drop in revenue. Let’s go with twenty-five to keep it clean.”
She opened up a spreadsheet and created three columns: Scenario One, Scenario Two , and Scenario Three . Under Scenario One , she typed “5% revenue drop,” and under Scenario Two , she wrote “25% revenue drop.”
She then looked back at me and asked the question I was dreading. “What do we want to put for the Scenario three column?”
I stood up and started pacing, which was my habit when I needed to think deeply or make a hard decision. This would be both.
“I do have a number, but I want to give you my reasoning first because I’m guessing your number will be more drastic than mine,” I said.
“That’s my job. I have to be the most conservative planner on the leadership team. I don’t want to be...” She trailed off. It was a recurring theme with Rachel. As the head of finance and operations, being risk-averse was a necessary but tough part of her job—mainly because the rest of us were always more bullish.
“Hey, I know that. We all know that! We love you for it, and we need that from you. There are plenty of times you helped us from driving right off a cliff. But I do want to explain why my guess on the drop in revenue isn’t likely to be as deep as what you’d predict.”
“Go for it,” she said, eager to change the subject.
“We’ve stayed focused on new business. Our pipeline remains very strong. I expect leads will slow down, but I don’t see them drying up. Businesses still need what we do, and we’re good at finding them.”
Key point: Focus on growth. Too often, teams will work hard on new business, get some wins, move their attention to other things, only to look up six months later and realize their sales pipeline has dried up. A consistent growth mindset—more than strategy, case studies, or any other sales concept—is the vital area of focus.
“I don’t see a massive change in client work across the board. We have worked extremely hard to build trusting relationships with our clients. We’ll do right by them during this period. Steve has created an entire playbook about how to be the best partner we can be over the next several months.”
Rachel cleared her throat, “Kinda feels like you’re stalling here.” She winked to show she was mostly kidding.
“Fine. I think we’re in as good a spot as we can possibly be. My worst-case scenario is a revenue drop of forty percent.”
She smiled at me and said, “That’s the same number I came up with.”
She put “40%” under the Scenario Three column. Last, she wrote the corresponding revenue numbers under each scenario.
“Now we have to decide how profitable or unprofitable we are willing to be during this period,” she said. “We have cash in the bank equal to two months of current expenses. And we have the line of credit available with the bank for the same amount.”
“Yep. Which goes back to why you’re so important to this team,” I said, giving a wink back. “I even debated with you last year when you wanted to establish the line of credit. My point was that we didn’t need it, and your point was...”
She finished, “that we establish a line of credit or a loan with a bank when you don’t need it because they only want to give you credit if you can cover it. The worst time to ask for money from the bank is when you need it.”
Key point: Save at least two months of expenses in cash. Try to establish a line of credit with your bank equal to that amount. You don’t have to use it, but you never know when disaster will strike. As your company grows, always look to increase your cash on hand and your line of credit accordingly.
“That reminds me,” I said. “I’ve been reading about what will happen in the market and how devastating this might be for all companies, especially banks. It seems like we need to go back to the mantra we kept saying in the early days of our business: cash is king.”
“I totally agree,” she said. “I have a list of things to try to help us preserve cash. I’ve set up a time to talk with our landlord to see if we can get a deferment on payments. I’ve heard that some building owners will let you have a few months of not paying rent in exchange for an extension on the lease. I’ll try that.”
“I’m also taking the marketing budget down to the bare minimum, and I recommend that we pause our 401k contributions for the foreseeable future. I imagine most team members will be pausing their personal contributions as well,” she said.
I hated to pause things like that, but it was the right thing to do. “Yes, let’s bounce that off the leadership team. It seems like that’s the right approach.”
“I’m also going to speak with the bank to see if we can increase our line of credit, just in case. I’ve been reading that banks may end up restricting loans and lines of credit if things go the way many economists think they will.”
“You mean pulling some of the line even if we don’t need it? I don’t know about that,” I said.
“Here’s the thing. If we need it, of course, we’ll be happy that we have it. And if we don’t end up needing it—which will mean things didn’t get as bad as we thought—then we won’t mind paying a few months of interest on it,” she said.
“If we run our business at, let’s just say break-even, then we should never need it given the amount of cash we have on hand, right?” I asked.
“Not necessarily,” she said. “We might be running at break-even, but if some of our clients aren’t able to pay us on time, or at all, then we could have a gap in our cash flow. I think there’s a pretty good chance of that happening.”
She paused and turned back to her laptop. In just a moment, she’d calculated the amount of interest we’d pay if we pulled half of our line of credit and held it for six months. It wasn’t a significant amount, so I agreed. We didn’t have any idea what was to come, and giving ourselves the best chance of survival was paramount.
Key point: Do everything you can to preserve cash. Pull from your line of credit, ask your landlord if you can defer rent payments, talk to your vendors, and see if you can get extended payment terms—anything to give yourself more runway to make it through a recession.
We had the line of credit figured out, but we were far from done. “Okay, Will. Now, what about acceptable profitability?” Rachel looked at me quizzically. “What do you think? Should we allow ourselves to break even during this period? Should we try to hold a meager profit, say five percent? Or should we allow ourselves to be slightly unprofitable, dipping into our line of credit or our cash in the bank?”
“I think that we need to allow ourselves to break even for several months before making any changes, using the cash we have to get us through,” Will said.
“Okay, Will. Last thing. We have to talk about our largest expense. You know it’s our staff.”
I had thought about this. I loved our team. The people line item was the most expensive on our P&L. But putting someone out on the street to find a new job in the middle of an economic recession? That would have to be the last resort.
This process was so hard. “Okay, so business survival has to be the priority. If the business goes away, then none of us will have a job. If we’re going to take care of our people, we have to take care of the business. We will be careful how we walk that line,” I said, partly to make sure we were on the same page, and partly because I was stalling.
Luckily, Rachel jumped in. “What if we come up with an acceptable amount of the cash we can use to keep us at our agreed-on baseline profit margin? And that cash gives us the buffer before we need to do any layoffs?”
“That makes sense,” I said. “I feel like the lowest we can go on cash in the bank before we make any cuts would be one and a half months of expenses. That gives us two and a half months of available cash for our buffer. I think we allow ourselves to break even, and we use the available cash to keep us there. The longer we can make the available cash last, the longer before we have to make any layoffs.”
“There’s a middle option we need to discuss,” she said. “We’re making the changes we can make now, things like pausing the 401k, reducing marketing spend, and trying to get the rent pushed, but we should also discuss the potential of reducing overall salary as a middle point.”
This option was something that I had been thinking about as well. I hated the idea of asking people to take a salary cut, but it was better than laying people off.
“I agree. That’s our first step. And I think it is something we do before we start pulling from our cash reserves,” I said. I could tell this surprised her.
“Really? I was thinking we pull from our cash reserves and then make the salary cuts, with the last resort being layoffs,” she said.
“We could do it that way, but then our runway would be extremely short. Our goal, as I see it, is to give ourselves the best chance to survive this, no matter how long it goes. We need to buy time. If we make twenty percent salary cuts across the board and only pull from our cash reserves if we need to, we’ll have a much longer runway.”
“Hold up, let me do some math,” she said. She hammered on her keyboard for a few minutes. “Okay, if we did a twenty percent salary cut, that two and a half months of cash would actually cover more than three months of expenses.”
“Super. If we hit our predicted worst-case scenario revenue drop, how long would that give us before we had to do any layoffs?” I asked.
After another couple of minutes, she said, “That would give us more than six months before we would have to let go of any employees.”
“Perfect,” I said. “So here is where we are. We will tighten our belts and do what we can to increase our cash position. If we see that we are falling below breakeven, we will implement the twenty percent salary cuts across the board. That gives us two and a half months of cash to keep ourselves at break-even. When that runs out, we will consider layoffs, but only then. How does that sound?”
“It’s a solid plan. The hardest part will be to consider what team members we might have to lay off if it comes to that point.”
She was right. We spent time talking through that scenario, focusing mostly on how to be as fair as possible with our team members. We started with the science that goes into staffing decisions—like what kinds of work we were doing, which determined the skills we needed to continue earning revenue. But there was a great deal of heart and emotion at play. Our team members were people, not just valuable practitioners.
The reality was, we could try to prepare thoughtfully, but wouldn’t really know how this part of the strategy would play out until we were in the middle of it.
We also spent time making plans for how we would support any team members who we did have to lay off. Besides giving them as much severance as possible, we would work hard to help them find a new position. I made a note to get more input on that from our leadership team.
We finished mapping out a complete scenario. It was hard, but we had our plan, and I had to start thinking about how to share it with the team.
Key point: Be willing to think creatively about the things you can do to help keep your company alive. Ideas such as cutting everyone’s salary might seem untenable at first, but it might be the best decision if the alternative is laying off team members. Only you will know the right course to take, but make sure you’re thinking creatively and evaluating all possible options.