With all the chaos in the economic
and financial markets these days, largely around the impact of new tariffs, it
is causing unexpected and unfortunate turmoil for many businesses today. Businesses that used to be growing are seeing
declines, and businesses that used to be generating healthy profits may now be
experiencing losses. That can be a scary
time for the most seasoned executives, and even more so for startup executives
living it for the first time. This post
will help you figure out how best to navigate these choppy waters.
Why is This Happening?
Tariffs are typically very bad for
the economy. Although it may raise
revenues for the government in the short run, it raises the prices of goods and
services that are imported from the countries in which tariffs are
imposed. And right now, tariffs of varying sizes are flying around many different countries and industries, wrapping
pretty much everybody into this “dust storm”.
This means as importing costs go up with the tariff costs, either you
will pass through those increases in the form of a higher selling price (which
will lower demand and profits) or you will eat those increases at the original
price (which will hurt your margins and profits). Neither is a good outcome for your bottom
line.
What Are Your Options to React?
When profits are in a free fall,
you really need to assess the situation and determine your best path
forward. For many, that could include
dramatically lowering your cost structure with layoffs or otherwise, to help
extend your cash runway so you can live to fight another day. Whether you make these cuts, and the size of
these cuts, is the conversation for today’s article.
Key Questions You Need to Ask
Yourself?
In This Reduced Economy, Will I
still be Profitable? This is a very
important question. If you think you
will still be profitable, then any cuts are optional depending on how high of a
profit you want the business to generate for its shareholders. Maybe your shareholders will have a longer
term perspective and will not want to “rock the boat” in the near term, if they
see a viable path to recovery in the medium term. But if you are expecting losses, cuts may be
your only option, unless you are sitting on a big pile of cash that can fund
your newfound cash burn rate.
Do We Feel This is a Short-Term
or Long-Term Hiccup? If you feel the
impact will be short in nature (e.g., under a year), you may have a different
perspective than if you feel the impact will be longer term in nature (e.g.,
over a year). But for issues like this,
you don’t always have a crystal ball with which to perfectly predict the
future. So be conservative in your
thinking, assume it could be much longer than you think, and build in the
appropriate cash cushions into your forecasts.
How Long is My Cash Runway? Your cash position will often dictate your
best path forward. If you have enough
cash to fund the next 18-24 months in a reduced sales environment, maybe you
will be okay with no changes. But for
most startups, they do not have the luxury of sitting on a lot of excess cash. So if you are incurring newfound losses and
your runway is under 12 months, it is time to start chopping, as raising funds
in this economic climate will be very difficult.
How Important is It to Retain
Key Talent? In highly specialized
industries, making cuts can be extra painful.
You have invested a lot of institutional knowledge into your team, and
you don’t want that to walk out the door unless you really have to. So your decision around cuts may be directly
related to how hard will it be to hire their replacements down road. But be honest with your assessments here, not
everyone can be the irreplaceable “Michael Jordan” on your team.
When Should I Make Cuts? As fast as humanly possible. The faster you cut, the quicker you start
saving your cash, which will be a hot commodity in down markets like this.
How Deep Should I Cut? As deep as you can without putting the core
of the business at risk. More is better
than less, remember the deeper the cut, the more cash you start saving, again
back to that hot commodity in these markets.
In all cases, your cash runway will help you decide whether you are
cutting 10%, 20%, 30% or more. But cut
enough that you don’t have to go back and cut a second time down the road. The worse thing you can do to your staff is having
them constantly worrying about the axe hanging over their heads in repetition.
How Will Cuts Impact My
Culture? Yeah, cuts are typically not good for culture
building in the immediate term. The
remaining staff just watched all their friends and colleagues walk out the door
under unexpected circumstances. They
will be grateful they “survived”, but they will potentially be angry with
management as the ones who dropped the axe.
As long as you are 100% transparent with your team about what the
situation was, how tariffs impacted the business, and that you didn’t have any
other choice to save the company and their jobs. Hopefully, they are mature
enough to understand the situation and culture will hopefully rebound over time.
Are There Alternatives to Cuts? Other than raising capital, you can get
creative in how cuts are implemented.
For example, let’s say you have a staff of 10 salespeople all making
$50,000 base and $50,000 in commissions (at 5% of sales). Instead of cutting 3 people to save $300,000,
you could change the compensation plan for all.
You can move all ten salespeople to a “commission only” model (which
keeps everyone with the company). That
puts the onus on them to sell in order to get paid any amount at a higher 10%
commission. But if they don’t sell, you
don’t have the fixed overhead of their salary to pay. This may upset all 10 people instead of
upsetting the 3 that would otherwise have been cut, which may have everyone
looking for the door, but it is an option.
The more you can implement a single action and be done with it, the
better, as compared to solutions that drag out the pain for everyone over a
longer period of time.
Closing Thoughts
Hopefully, you now have a better
understanding of how to navigate the current choppy waters many of us are
experiencing. Follow the guidance in
this post, and you should survive to live another day and best position the
business to weather the storm until the markets start to recover. Good luck and hang in there! This is never an easy topic to deal with.
For future posts, please follow me on Twitter at: @georgedeeb.