This article was previously published in the Harvard Business Review. It has been updated with new information on the US Paycheque Protection Program and the Economic Disaster Loan Program.
What Negative Cash Companies Must Do To Survive
We are in unknown territory with the Covid-19 pandemic. But it is getting darker and darker.
Companies surviving this crisis will have CEOs who can quickly assess these new circumstances, recognize new models and opportunities, and act urgently to take immediate actions to rotate and restructure their businesses. Those who do not survive may not survive.
Here is a five-day manual to help the CEOs of startups with negative cash flows or about to become negative, assess the new normal and react quickly and urgently.
The survival of your business depends on a simple formula
The survival of your business in this downturn can be captured in a simple formula.
Survival = (speed of your understanding of the situation) x (magnitude of the pivots / cuts / lifeboats choices you make) x (speed of your time to make these changes)
Note that the word speed appears twice. Now is not the time to create committees, task forces or build broad consensus. Even with imperfect information, the future of your business depends on your ability to make quick decisions and start taking action.
If you're a CEO who can't get you to act quickly and wait for someone to tell you what to do, then your investors, or more likely the market, will make these decisions for you.
Huge segments of the economy have closed: travel, hospitality, restaurants. Any fixed cost location that depends on pedestrian traffic will be pressurized. With millions of people unemployed in the next quarter, it is obvious that discretionary purchases such as furniture, fashion, lifestyle will be hit. But other companies like law firms, outsourcing companies, real estate companies, will also be affected. The ripple effects will not be obvious at first. Your customers will no longer be your customers. Your income plans are no longer valid. To understand the state of affairs, you need to quickly assess your internal and external environments in the future.
Day 1: Prepare an internal and external environmental assessment:
What the external and internal environment looked like For Your Business today? What do you think the world will look like for each of the next five quarters? For companies that burn money, like startups, how much money do you have? What is your monthly cash flow at your new low income level? How many months of money do you have? Reduce costs to stay alive for 24 months.
- State of the economy
- Shelter in place yes / no?
- Health of your current target markets
- Buy actively? You do not forward calls? Bankrupt?
- Emergence of new markets
- Are there new opportunities?
- Expected recovery date
- Workers can come back
- Your customers start buying
- Check if the Paycheque Protection Program (here and here), which offers 100% federally guaranteed loans to small businesses, can apply to your business. See also if the economic disaster loan program applies.
- If you're raising money, check whether your investors are still on board – with the same conditions – or not at all
- Operating numbers
- Worst case liquidity and probable withdrawal date
- Debtors, creditors
- Pipeline / sales forecast
- Marketing program expenses
- Salary costs / other variable costs
- Additional sources of capital – For existing businesses: 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 think too much. And especially don't outsource this to your staff. Set up a war room and work together with your CFO and C-level staff until it's done. This will begin to align your team with the size of the problem. The CEO has to deal with so many of the biggest existing customers to get a direct understanding of the magnitude of any shortfall. If you expected angel financing or risk, contact your investor (s) by phone. Some VCs move away from signed condition sheets. Others reduce their ratings. The CFO should be on the phone to find additional sources of capital. No market research will do it right. No one can predict how it will happen and for how long. All we know is that it's going to be very different from what it was a few weeks ago and that it's probably going to be worse in a few weeks.
Day 2: Repeat the assessment with your investors / board of directors
Whatever assessment you develop, you should get feedback from your board and investors. Although you only see your own business, we hope they get data from multiple companies in a wider set of industries. If you’re a startup, you’ll also get a feel for the nuclear winter of the funding scene for your market / business
Boards should insist on immediate assessment and be actively involved. I listened to a board call with an enterprise software company this week, and when the CEO said, "Our vice president of sales assured me that our pipeline would not be affected. " The board members gave him a warning shot: there was going to be a much more realistic assessment tomorrow based on his conversations with first-hand clients, or a new CEO. Some CEOs can and will rise to the occasion, but having a unified board of directors can speed up the process.
But what if you think the situation is more serious and you disagree with the assessment of your advice? CEOs in this position are going to have to face a major career decision – accept advice that you think will damage / destroy the business – or put your work at stake. Remember, in a year, nobody does want to be CEO of a bankrupt company whose complaint is: "I did what the board told me to do."
Once you have agreed on what the world will look like, it is time to plan your new business. This plan has three parts: pivots to your new business model, changes your operating plan and what initiatives you are saving for recovery. The plan must also take into account that this crisis has highlighted the vulnerability of businesses to a single source of supply. The CEOs of companies that manufacture goods in the United States are on the verge of facing a moral dilemma. China and South Korea are restarting their factories. In the future, are you moving your supply chain from China or at least creating a second source from other countries? Do you source / build things there by firing people here? What does your board suggest? What do you think is the right thing to do?
Days 3 and 4: Prepare a new business model and a new operating plan
First, think about the potential pivots. Ask yourself: are there now new customers, new services and new channels to look for? What parts of your business model can now serve the new standard where business is booming – work / distance education, distance social cohesion, telemedicine, home delivery, etc.?
- If you had brick and mortar locations, how much can you pivot to e-commerce (for the 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 reused? What about parts of your manufacturing lines?
- Online / virtual learning – schools will need to embrace virtual learning like never before.
- B2B – cloud services, online meetings, virtual workforce management, collaboration tools. With more work from home, all of these services will see increased demand from businesses
- Virtual travel / tourism – how can consumers get out without leaving home security?
- Remote workforce automation – after the obvious conference tools, how do you maintain cohesion and coordination?
- Remote health care – Can you do an initial screening / diagnosis online before bringing a patient in?
- Personalized video entertainment – VOD, AVOD, abbreviated social sites, Twitch, etc.
Then, trace the changes to your operating plan. What cuts are you going to make on spending programs – marketing, service, manufacturing, R&D? What are your “lifeboat choices” – what layoffs, renegotiate debts, rents, leases, how to compromise between cash management and revenue growth? How can you focus on customer loyalty rather than acquisition?
As part of these operational changes, make sure your HR and finance managers recognize that they have entirely new jobs.
Your financial director now becomes the person in charge of cash management. Draw on all debt commitments. Ask for existing and new lenders for additional financing. Call all the major suppliers and ask for lower prices. If applicable, offer to sign a longer deal in exchange for lower cash payments in 2020 and 2021. Check if your fixed costs are really fixed, or will they agree to defer some for higher payments at a later date. Make sure your CFO is familiar with the paycheck protection program (here and here) as a potential source of money and to avoid / delay layoffs.
Nothing is more important than ensuring that the company can continue to pay its employees.
Your HR manager is now responsible for layoffs. He or she has 48 hours to develop there, or you have to find someone else in the ranks to do it. Before layoffs, cut all wages by 20%. Reduce CXO wages by at least 30%. Give employees equity in the value of their reduced wages. Try to protect the most vulnerable employees. Letting go of people must be done with compassion and adequate compensation. And if you do it right, we hope it will only be done once.
For the remaining employees, offer distance therapy to cope with the stress of working from home and pay for any equipment / network upgrades.
When 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 could allow you to take advantage of these changes? To recover and grow quickly? Or to launch new products? Or if you have enough cash, now is the time to hire great people who have never been available.
Although you have prepared the internal and external evaluation with only your level C staff, you now want to quickly engage the collective intelligence / wisdom of the company. Ask everyone in the business to suggest changes to the business model, operating plan and stimulus plan.Your employees probably have ideas and see hidden opportunities in the C-suite. This will mean to each employee that the time has come to work on deck and that you will make decisions to quickly separate the crucial from the irrelevant.
You need to communicate, communicate and communicate more to your employees about why you are asking for their ideas. This is the perfect time to start a Daily updated from C-suite. This is essential if your employees work remotely. Let them know what you are learning and then, when you start implementing changes, let them know why.
Day 5: Iterate with investors / adviser
Whatever business model, business plan and recovery plan you offer, you need to get feedback from your board. Keep in mind that they are probably dealing with several companies that are rescheduling quickly, so remind them of the assessments that you have mutually accepted. Then explain to them why the changes you are proposing fit this 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 difficult parts of the new operational plan that you need to address: layoffs and culture.
Carpenters use the aphorism "Measure twice, cut once". The same goes for layoffs. In every downturn I have experienced, there have been CEOs who have treated the layoffs as "a death of a thousand cuts." For example, in a company with 1,000 employees, they would fire 100 people in the first month, 100 more the next month, and then 100 the third month to increase to 700 people over several months. Rather than being productive, the constant layoffs demoralized and paralyzed the remaining workforce. Employees saw that management was an endless downward spiral in sight. And everyone was worried, "Am I next?" I have seen other CEOs immediately fire 400 people and there are still 600 left. If / when they overtook, they could re-hire 100 people (including some of the same people who were fired). While the massive layoffs created an immediate shock, people have adapted. They were worried but began to feel more secure. When hiring resumed, everyone was relieved: "The worst is over. Things are getting better. (Don't forget to check if the paycheck protection program can save some or all of these jobs.)
To start adapting the culture to this new reality, communicate these changes in business model and operating plan to your employees. Offer relentless optimism for survival, but ruthless cost reduction (starting with CXO salaries.) Let them know that as CEO, you are going to micromanage for survival and expect what everyone does the same. You will be relentless, direct and clear that once the decisions are made, there is no disagreement. And remind them that together you are all working to save the business and its own jobs.
At some point, this crisis will run its course. Running this five-day game book will help your business survive, so when the recovery comes, you will emerge stronger and ready to hire and grow again.
- CEOs need to take control and take drastic action. Be decisive and do it immediately
- Survival = (speed of your understanding of the situation) x (magnitude of the pivots / cuts / lifeboats choices you make) x (speed of your time to make these changes)
- Involve the board and the rest of the business
- Communicate with all employees daily
- Move quickly and urgently, you have days – not weeks or months
- As painful as it can be, when you make cuts, do it once
- Suppose you emerge on the other side. What would you like to have kept?
Filed Under: Venture Capital |