This article previously appeared in the Harvard Business Review. It’s been updated with new information about the U.S. Paycheck Protection program and the Economic Injury Disaster Loan program.
What cashflow-negative companies must do to survive
We’re in uncharted territory with the Covid-19 pandemic. But it’s increasingly looking grim.
Companies that outlast this crisis will have CEOs who can rapidly assess these new circumstances, recognize new patterns and opportunities, and act with urgency to take immediate action to pivot and restructure their companies. Those that don’t may not survive.
So here’s a five-day playbook to help CEOs of cash-flow negative startups, or ones about to go negative, assess the new normal and respond with speed and urgency.
Your Company Survival Depends on A Simple Formula
Your company’s survival in this downturn can be captured in a simple formula.
Survival = (speed of your understanding of the situation) x (the magnitude of the pivots/cuts/lifeboat choices you make) x (the speed of your time to make those changes)
Notice that the word speed appears twice. This is not the time for committees, study groups or widespread consensus building. Even with imperfect information, the future of your company depends on your ability to make rapid decisions and start acting.
If you’re a CEO who can’t quickly bias yourself for action and if you wait around for someone to tell you what to do, then your investors, or more likely the market, will make those decisions for you.
Huge segments of the economy have shut down: travel, hospitality, restaurants. Any place with a fixed cost that relies on foot traffic will come under pressure. With millions of people out of work in the next quarter, it’s obvious that discretionary purchases like furniture, fashion, lifestyle will take a hit. But other businesses like law firms, contracting firms, real estate firms, will take hits, too. The ripple effects won’t be obvious at first. Your customers will no longer be your customers. Your revenue plans are no longer valid. To understand the state of things, you need to rapidly assess your internal and external environments going forward.
Day 1: Prepare An Assessment of the Internal and External Environment:
What did the external and internal environment look like for your company today? What do you believe the world will look like for each of the next five quarters? For companies burning cash, such as startups, how much cash do you have? What’s your monthly cash burn at your new low revenue level? How many months of cash do you have? Cut costs to stay alive for 24 months.
External Assessment
- State of the economy
- Unemployment %
- Shelter in place yes/no?
- Health of Your Current Target Market(s)
- Actively buying? Not returning calls? Out of business?
- Emergence of New Market(s)
- Are there new opportunities?
- Forecasted recovery date
- Workers can return
- Your customers start buying
- Check if the the Paycheck Protection Program, (here and here) which provides 100% federally guaranteed loans to small businesses, can apply to your company. Also see if the the Economic Injury Disaster Loan program applies.
- If you were raising money, validate whether your investors are still on board – with the same terms – or at all
Internal Assessment
- Operating Numbers
- Liquidity and likely cash-out date under your worst-case scenario
- Accounts receivable, accounts payable
- Sales pipeline/forecast
- Marketing programs spending
- Payroll costs/other variable costs
- Sources of additional capital – For existing companies: debt commitments, and new lenders. Can the Paycheck Protection Program, (here and here) be a source of capital?For startups: source of VC money?
Don’t overthink this. And most importantly do not outsource this to your staff. Set up a war room and work with your CFO and C-level staff together until it’s done. That will start to get your team aligned about the size of the problem. The CEO should dial through as many of the largest existing customers to get a firsthand understanding of the magnitude of any revenue shortfall. If you were expecting angel or venture funding get on the phone to your investor(s). Some VC’s are walking away from signed term sheets. Others are cutting their valuations. The CFO should be on the phone to sources of additional capital. There is no market research that’s going to get it “right.” No one can predict how this plays out and for how long. All we know is that it’s going to be very different than it was a few weeks ago and likely going to be worse a few weeks from now.
Day 2: Iterate the assessment with your investors/board
Whatever assessment you develop, you need to get feedback from your board and investors. While you’re seeing just your own company, hopefully they’re getting data from multiple companies across a wider set of industries. If you’re a startup you’ll also get a sense of how much of a nuclear winter the funding scene is for your market/company.
Boards need to insist on an immediate assessment and be actively engaged. I listened in on a board call with an enterprise software company this week, and when the CEO said, “Our VP of sales assured me our pipeline won’t be affected.” Board members gave her a wakeup call: there was either going to be a much more realistic assessment tomorrow based on her first-hand customer conversations, or a new CEO. Some CEOs can and will rise to the occasion by themselves but having a unified board can accelerate the process.
But what if you think the situation is more dire and you disagree with your board’s assessment? CEOs in this position are going to face a major career decision – go along with advice you think will damage/destroy the company – or put your job on the line. Remember, a year from now no one wants to be the CEO of a company out of business whose lament is, “I did what the board told me to do.”
Once you have agreed on what the world will look like, it’s time to build the plan for your new company. This plan has three parts: Pivots to your new business model, changes to your operating plan, and what initiatives you save for the recovery. The plan must also take into account that this crisis has exposed how vulnerable companies are to a single source of supply. CEOs of companies that manufacture goods in the U.S. are about to face a moral dilemma. China and South Korea are starting their factories up again. Going forward, do you move your supply chain from China or at least create a second source from other countries? Do you source/build things there while laying off people here? What does your board suggest? What do you think is the right thing to do?
Days 3 and 4: Prepare new business model and operating plan
First, think about potential pivots. Ask yourself: Are there now new customers, new services and new channels to pursue? Which parts of your business model can now serve the new normal where business is booming – remote work/education, social cohesion over distance, telemedicine, home delivery, etc.?
For example:
- If you had brick and mortar locations, how much can you pivot to Ecommerce (for basics), so customers can acquire goods without having to leave the house? Can you also offer specialized services?
- Automated delivery services – the more people you can take out of the equation, the safer the product. Are there parts of your supply chain that can be repurposed? What about parts of your manufacturing lines?
- Online/Virtual learning – schools will need to embrace virtual learning in a way they haven’t before.
- B2B – cloud services, online meetings, virtual workforce management, collaboration tools. With more work from home happening, all of these services will see increased demand from companies
- Virtual Travel/Tourism – how can consumers get out without leaving the safety of their house?
- Remote Workforce automation – past the obvious conferencing tools, how do you maintain cohesion and coordination?
- Remote health care – Can you do initial triaging/diagnosis online before having a patient come in?
- Personalized Video Entertainment – VOD, AVOD, Short Form Social Sites, Twitch, etc. …
Next, plot out the changes to your operating plan. What cuts will you make to spending programs – marketing, service, manufacturing, R&D? What are your “lifeboat choices” – what layoffs to make, renegotiate payables, rents, leases, how to trade off cash management versus revenue growth? How can you shift focus to customer retention versus acquisition?
As part of these operating changes, make sure your heads of HR and finance recognize that they have entirely new jobs.
Your CFO now becomes the head of cash management. Draw down all debt commitments. Ask existing and new lenders for additional funding. Call all large vendors and ask for lower prices. If appropriate, offer to sign a longer agreement in exchange for lower cash payments in 2020 and 2021. See if your fixed costs are really fixed, or will they agree to defer some for higher payments at a future date. Make sure your CFO is familiar with the Paycheck Protection Program, (here and here) as a potential source of cash and to avoid/defer layoffs.
Nothing is more important than assuring the company can continue to pay its employees.
Your head of HR is now head of layoffs. He or she has 48 hours to grow into it, or you need to find someone else from the ranks to do it. Before layoffs, cut all salaries by 20%. Cut CXO salaries by at least 30%. Award equity to employees equal to the value of their reduced salaries. Try to protect the most vulnerable employees. Letting people go needs to be done with compassion and adequate compensation. And if you do it correctly, it will hopefully be done just once.
For those remaining employees, offer remote therapy to deal with the stress of working from home and pay for any equipment/network upgrades.
As you make these plans, remember: There will be a morning after. What changes in your industry will be permanent? If you have sufficient cash reserves, what initiatives do you want to keep in the lifeboat that may give you the ability to take advantage of these changes? To recover and grow quickly? Or to launch new products? Or if you have sufficient cash, now is the time to hire great people who were never available.
Although you prepared the internal and external assessment with just your C-level staff, now you want to rapidly engage the collective intelligence/wisdom of the company. Ask everyone in the company to suggest changes to the business model, operating plan and recovery plan.Your employees likely have ideas and see opportunities not visible in the C-suite. This will signal to every employee that now is the time for all-hands-on-deck and that you will be making decisions to quickly separate the crucial from the irrelevant.
You need to communicate, communicate and communicate some more to your employees about why you’re asking for their ideas. This is the perfect time to start a daily update from the C-suite. This is critical if your employees are working remotely. Let them know what you’re learning and then when you begin implementing changes, tell them why.
Day 5: Iterate with investors/board
Whatever business model, operating plan and recovery plan you come up with, you need to get feedback from your board. Keep in mind they’re likely dealing with multiple companies rapidly replanning, so remind them about the assessments you mutually agreed on. Then walk them through why the changes you’re suggesting match that plan. They may have seen new ideas from other companies in their portfolio so be open to additional suggestions.
Beyond the five-day plan, I want to specifically address two of the most challenging parts of the new operating plan you need to address: Layoffs and culture.
Carpenters use the aphorism “Measure twice, cut once.” The same applies to layoffs. In every downturn I’ve lived through, there were CEOs who handled layoffs as “a death by a thousand cuts.” For example, in a company with 1000 employees, they’d layoff a 100 people the first month, another 100 the next month, then a 100 the third month to downsize to 700 people over several months. Rather than being productive, the constant layoffs were demoralizing and paralyzed the remaining workforce. Employees saw that the direction was a downward spiral with no end in sight. And everyone worried: “Am I next?” I’ve watched other CEOs immediately layoff 400 people and have 600 left. If/when they overshot, they could rehire 100 people (including some of the same people who had been laid off). While the mass layoffs created an immediate shock, people adjusted. They worried but began to feel more secure. When hiring began again, everyone was relieved: “The worst is over. Things are getting better.” (Remember to investigate whether the Paycheck Protection Program can save some or all of those jobs.)
To begin adjusting the culture to this new reality, communicate these business model and operating plan changes to your employees. Offer relentless optimism for survival, but ruthless cost-cutting (starting with the CXO salaries.) Let them know that as CEO you are going to be micromanaging for survival and expect each of them to do the same. You’re going to be relentless, direct and clear that once decisions are made, there are no disagreements. And remind them that together you are all working to save the company and their own jobs.
At some point this crisis will run its course. Running this five-day playbook will help your business survive so when the recovery does come, you’ll emerge stronger and ready to hire and grow again.
Lessons Learned
- CEOs need to take control and take drastic action. Be decisive and do it immediately
- Survival = (speed of your understanding of the situation) x (the magnitude of the pivots/cuts/lifeboat choices you make) x (the speed of your time to make those changes)
- Involve the board and the rest of the company
- Communicate with all employees daily
- Move with speed and urgency, you have days — not weeks or months
- As painful as it might be, when you make cuts do it once
- Assume you’ll emerge on the other side. What will you wish you had kept?
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steveblank, Khareem Sudlow
