I recently moderated a virtual roundtable on the topic of managing finances in a time of economic uncertainty – a pressing issue these days. The theme of the discussion was that while tough decisions need to be made, CEOs and senior finance executives shouldn’t panic. The economic recalibration we’re going through is not unprecedented; these are not uncharted waters. With careful forecasting and strategic planning, finance leaders can help their companies adjust and emerge more resilient.
Joining me to share their experiences from past economic downturns and provide actionable advice were:
- Laura Perrone, CFO of Celona, a Norwest portfolio company that provides private wireless networks. Laura previously was CFO and/or VP-finance at several companies, including Rendition, Icarian, Omneon, and Picarro.
- Mike Dinsdale, Managing Director of Akkadian Ventures, which is focused on alternative liquidity solutions for entrepreneurs and investors. Mike was previously CFO at Gusto, DoorDash, and DocuSign.
- Robert Park, CFO of Dolby Laboratories. Robert previously held positions as CFO and/or VP, finance at companies including BlueJeans, Practice Fusion, Chegg, PayPal, and McKesson.
You can watch our entire panel discussion at the bottom of this post. Here are some highlights and key takeaways that senior finance executives should focus on:
1. Be alert to changes in your environment
DZ: Changes in the business environment do not happen overnight. That was true in 2000 and in 2008, and it’s true today. Salespeople may look at several indicators about the health of the pipeline, but they tend to be more optimistic about the months ahead. Finance casts a more steely-eyed view to the task of monitoring the market.
RP: Velocity of deals, average size of deals, average length of deals – these are metrics you can’t manipulate as much because finance has more control over that. And you can see when deals are getting smaller and your net dollar retention is going down. That’s when your customers are starting to renew for less or not expand as much as they used to. They may squeeze you for a flat renewal, no renewal, cheaper price, put it up for RFP – those are the kinds of things you need to look for.
MD: Everyone has to have a real-time forecast all the time. It’s not a plan, it’s a forecast. So you can really understand where the variances are.
Sometimes there are signals in the macro environment that you can apply to your business. At Gusto, for example, we focused on small- to medium-sized businesses. For us, the number of new-business starts mattered, because there are some 400,000 of them every year, and most of them need the kind of payroll solutions that Gusto provides.
When we went into COVID, we started to look at new business starts. And while they declined, they didn’t do so as much as we had feared. At the same time, our own data showed that new companies had maybe five or six employees to start instead of six to eight. So, that combination of external and internal data sources helped us understand the business environment much better.
2. Have a five-year plan and monitor it closely
MD: We’re building growth companies, so we have to look at the long term. What does the company look like in five years? What’s the ideal? Then, what are the key metrics along the way for us to achieve that? Maybe that’s ARR per engineer, or ARR per employee. Start with that and then have a strategic discussion with everyone about the key things we need to change over the next five years to achieve our goals.
LP: I really focus on the top line. That’s paramount. And then I try to match that with having enough productive capacity to achieve the objective. Do we have the sellers? Do we have the supply chain? Do we have the engineering man-months required to achieve the product roadmap? What are the working capital requirements? In short, can we afford our appetite for growth?
RP: I also start with the five-year plan, and then measure your current course and speed: you’re either on-track or not on-track. Then look at the drivers that could change that. How many knobs could you turn to increase velocity and improve metrics over time?
And you always have to be agile. I was at PayPal during 2008, when there was nothing but uncertainty – kind of like today. And the more uncertainty, the more you have to plan. Because facts were changing so quickly, our annual plan was stale within three months, both top and bottom-line. Trying to stick to the annual plan was a fool’s errand. So, we had to look at our quarterly results, then create targets for the next quarter. If we missed on top line, expenses for the next quarter were not entitlements. Until we saw the right trajectory, we were going to adjust spending.
The level of agility required depends on the level of uncertainty in your business. If it’s a steady business with long-term contracts, you may not have to plan as often. But in a transactional business with high velocity, you’ve got to plan quite often.
LP: When we saw a changing environment at Celona, one of the things we did was refocus and close our aperture a little bit. We identified and intentionally pursued the market segments that were the most important — where we’re going to find the most receptivity for our products. Others we decided to delay until a later time.
3. Despite the turmoil, continue to focus on growth
DZ: In an environment where cash is cheap, the requirement for efficiency isn’t as high because you could just raise more capital and continue to grow inefficiently. But in capital-constrained environments like we are in today, companies need to be much more focused and be more efficient with the way that they spend.
And the need to maintain growth is essential. Because even if you survive this tumultuous period but you haven’t grown in two to three years, you will not be able to raise capital, because while investors may say ‘extend the runway,’ the reality is that we invest in companies that are exhibiting growth. It’s very difficult to manage expenses while still maintaining growth, and that’s what we spend a lot of time with our portfolio companies on.
4. Make the necessary adjustments
In parallel with increasing or maintaining revenues, controlling expenses is an essential strategy during times of uncertainty. The panelists focused on headcount.
MD: It’s essential that there be discipline around headcount. You must have guidelines for how and when people can initiate hires depending on variance from plan. Because when you get into a downturn, the biggest problem is reducing headcount. Winning is not more people; winning is less people with bigger numbers and getting more from each person.
“Winning is not more people; winning is less people with bigger numbers and getting more from each person.” – Mike Dinsdale
RP: If you’re going to have a RIF, do it once and do it right. Don’t take a little bit now and then a little more later. It’s a tough decision to make, so you don’t want to have to do it again for quite some time. I haven’t found that salary cuts work. You’ll lose your top talent, including executives.
Employees don’t want to just hear cuts across the board; that sounds ham-fisted. They want to hear that we’re going to be more focused. That may mean consolidating product groups or getting out of certain market segments. And you can tie that to expenses, to where you’re focusing your dollars. Be ruthlessly efficient about things like R&D spending, marketing spending, SEs per sales rep, etc. These problems don’t age well, and every quarter matters.
“Employees don’t want to just hear cuts across the board. They want to hear that we’re going to be more focused.” – Robert Park
LP: One of the habits we get into is assuming we will replace someone who’s exited the business. But that may not always be the best decision. What if you need someone with different skills to address a higher priority objective? It’s like a sports team: I need a right-hander, so can I trade a left-hander for one? Taking action on underperformers is difficult. But waiting only costs you more because you have three or four months of salary that you’ve invested, plus the cost of severance.
MD: It is important that any cuts are made through a lens of what has the lowest impact on strategic objectives. Circumstances can change, and sometimes organizations must change in response. Just because people are in someone’s budget currently, they don’t have to stay there forever. When things start to change, we should think how we can be more effective. Someone should raise their hand and say, “I’ve got two reqs, but I think I can get by with one so I am going to give it to someone else.” Or, “I’m going to let go the bottom five people, because I need to hire five other people to do things that I think are more important.”
I think it’s important to create a culture where people say ‘I can make do with less, because whatever you need to do is more important for the business long-term.’ I think it is really important to be on top of who your best performers are. Salary cuts across the board are ridiculous. It’s probably more likely you need to put in place performance bonuses to achieve results and keep your best people.
5. Standardize your planning
LP: I make a baseline of what I really expect to happen. Then there’s an upside and a downside. Nobody wants to invest in a no-growth company, so clearly we have to invest in the top line. I like to have half the plan be geared toward that top-line objective. But the other half of the plan needs to protect the downside, to act as a collar. So, if you don’t hit your revenue and cash-flow numbers, then you have to adjust your headcount and your program spend accordingly. So, I plan from a cash receipt standpoint for a downside scenario, but I invest to achieve the upside.
“I plan from a cash receipt standpoint for a downside scenario, but I invest to achieve the upside.” – Laura Perrone
MD: When you do any type of planning, it’s important to standardize and templatize everything. It’s not just a clean sheet of paper on which a department asks for everything they want. We have financial constraints, and your plan has to fit into that. I have always made it a hard line that your plan has to hit your financial target, no exceptions. On top of that you may have above-plan asks that may or may not get funded. But that will be assessed relative to all other initiatives and tied to the strategies and key metrics we want to achieve going forward.