Market volatility wreaks havoc on companies, especially those early-stage, VC-backed ones. If your company is under financial distress, the first thing to do is reexamine your operating plan. It’s vital to adapt and course-correct now in order to plan for the remainder of 2020 and get ready to scale. Let this be your call to action: The ones who adapt are the ones who survive.
VC-backed companies run on tight timelines. They’ve got milestones to achieve, customer relationships to build, and products to sell. Given these competing priorities, building a solid annual financial plan may not be top of mind. However — and I can’t emphasize this enough — you must have a solid operating plan to serve as your compass right now. With that in mind, here are three tips to help you adapt your finances in a market downturn.
1) Engage in scenario planning
As the name suggests, you’ve got to have multiple plans driven by their outlook on the sales forecast. In the B2B SaaS world, revenue forecasting can be done from the bottom-up (rolling up all pipeline customers, your best thoughts on deal size, and timing of closure) or top down (capacity planning based on the time to ramp up and execute against quota and attainment). In fleshing out these forecast, one should keep in mind trigger events:
- Changes in product demand
- Changes in customer situations
- Customer up or down shifts
- Shifts in funding situations
I always caution against putting $0 sales forecasts, even in the darkest of the hours. The downturn guidance for revenue revision is 30-40% from the previously approved operating plan. If you’re starting from scratch, please be sure to add your views and action plans on how to bridge the gap between pre-COVID-19 and post-COVID-19 forecast; it does not need to be precise, but it’s a good way to frame the CEO’s view on the outlook of your product.
Scenario planning gives the team more flexibility to manage expenses, plan for headcount, utilize other financing options, and shift budget modes when trigger events take place.
2) Move to zero-based budgeting
Most budgets start with historical expenses and sales forecasts, then take the incremental growth % to execute the top line. In zero-based budgeting, however, companies build their forecasts based on what is absolutely needed to support their sales forecast and drastically rethink their business models.
Zero-based budgeting works well when a significant investment lies ahead, but the near-term sales forecast is lower than what the original operating plan indicated. This method allows operators to prioritize their spending needs, but not be bound by historical spending. It also gives a drastic view on meeting competing priorities by categorizing expenses as keep, stop, or modify.
- Keep expenses: These are your vitals, like payroll, hosting fees, utilities, and rent. If possible, revisit the contracts you have with long-term partners to find fair updates.
- Stop expenses: These are unnecessary costs. Billboard advertising, for instance, is no longer wise given our stay-at-home orders. Unwind these contracts to stop the bleeding.
- Modify expenses: These are expenses that are still needed, but at a modified capacity. Things like new hires, marketing agency fees, and legal fees fit in this category.
3) Practice financial discipline
In early-to-late stage companies, monthly budget execution adds great operational discipline. For instance, Operator Collective sets a monthly budget they need to spend up to for each department, which then resets every month. For this to happen, each department needs to track expenses at the invoice level.
This may feel like a lot, but once you set the process in motion, it works. This is not only about fiscal discipline and transparency, though — it also provides a venue for people to discuss their plans and adjust as needed.
Bottom line: You’ve got to have a solid budget and operating plan
In today’s volatile economy, your budget is obsolete the moment it’s complete. So what’s the point of going through these processes?
Having an Annual Operating Plan serves as the proverbial “line in the sand” for management, employees, and the board. It offers a tangible way to track performance, calibrate, and course-correct. For this reason alone, budgeting is a worthwhile exercise, with the caveat that operators should treat it as a living organism, instead of putting the operating plan on the shelf to gather dust, only to be seen in a quarterly board meeting.
Once your Annual Operating Plan is in place, it’s wise to break it into mini-milestones and quarterly plans to execute and track against actual. Set up a dedicated, recurring regular meeting to align at a cadence that makes sense for your team. Start with a high frequency, then adjust as people become familiar with the practice. This sounds daunting, but it can be done in a simple Google sheet by listing out high level forecasts vs. actual performance. In doing so, your company will garner insight into the operation and results, and can use the information to plan better for the future and react as unexpected events occur.
We believe culture, diversity, and operational excellence are a key part of building truly great companies. Learn more at www.operatorcollective.com or on Twitter and LinkedIn.