Runway Planning, Cash Management & Cash Reduction

During the current uncertain times when there is little clarity about demand and supply recovery, the need of the hour is to ensure that your company maximizes cash runway. One of the steps for that is cost management. The steps you take can vary, depending on whether you have <12 months runway, between 12-24 months runway and >24 months runway

Marketing

Through the lockdown most businesses could see revenues going down to almost zero and even post that the recovery curve may be a 'U' shaped one vs a 'V' shaped one.

It may be prudent to stop all marketing expenses till business comes back to 'close-to-normal'. When things start to pick up, increase marketing slowly, keeping CAC low. Ramp it up as things become more stable.

Rentals

Use the opportunity to reduce leases that might have been non/low performing. Use of Force Majeure may be required if it’s part of your agreement.

<12 months runway

• Important to remember that your landlords ultimately stand to gain if you succeed. Explain the need of the hour to them
• Ask for 2-3 month (or more) of moratorium on full or part payments. Some companies are getting this for three months and for upto 50%
• Explore 20-30% discount on a full year’s rent as an alternative
• Renegotiate any escalation clauses that are set in the contract

12-24 months runway

• Take some or all of the steps mentioned above to increase your runway to 24 months

G&A (including technology costs)

• This is an important head item when it comes to cost savings, as most inefficiencies creep into general and administrative expenses during the growth phase and bull markets.
• Look for high cost items like optimizing Cloud spends and reducing external professional fees (consulting, legal, recruiting).
• Also go down to the bottom of the list and look at small line items like canteen costs, housekeeping (not salaries) and individual software subscriptions that are not being used at present.

Working Capital

<12 months runway

• Find ways to reduce this rapidly as this can be a massive source of cash savings. Try ways to work with suppliers to get relief on payable days. This is a long term partnership and hopefully in the long term they will benefit from having supported you in tough times
• Try to reduce inventory by decreasing orders and servicing any and all demands basis current inventory. It might be ok to let go of small demand vs. trying to build up inventory to service it
• Continue to push your enterprise customers to pay. It might be ok to take small discounts for immediate payments, as liquidity matters more than accrual economics at this stage

12-24 months runway

• Push your suppliers to increase payable
• Focus on collections from your enterprise clients

CAPEX

It is worth considering to stop all new capital investments and focus on the current business. Even if there is capital work-in-progress, pause the work and pick it up again when demand recovers.

Overall

It’s all hands on deck. Proactively involve functional leaders to ideate and execute these items. Communicate clearly to the entire organization so there is no confusion or water cooler conversations. These can only lead to more speculation and anxiety within the organization.

Be decisive and take actions in one single stroke – it allows people to feel secure about their future, knowing that going forward it’s BAU (or as close to it as it can be at this time)

<12 months runway

• This is CODE RED and it’s important to prioritize sustainability of the organization. Whatever doesn’t kill you will make you stronger for the long race ahead

12-24 months runway

• Try to cut costs nominally to increase your runway to 24 months

>24 months runway

• Good time to focus on cutting down on extra costs that might have built up during the inefficient, high growth phase.
• Burn FAT not MUSCLE

Advice for Founders

• Plan for U-shaped recovery – companies expecting a 20-100% drop in business over the next few weeks but planning for lower demand, for longer
• Expect equity financing to take longer or not happen at all till there is full global recovery
• India's startup system doesn’t operate in isolation and in fact, is dependent on external capital primarily from the US and China. I’ts likely that the Indian mid to late stage startup financing market will see a rebound only after their “home” markets rebound. So even if India escapes the Covid-19 crisis, we will still have to wait for the rest of the world to come back
• With all this, managing burn to ensure runway through 2021, or at-least till June 2021, is key
• Cost and cash out-flow rationalization
  • Marketing: 50-100% cut in most cases; digital services with positive marketing RoI can increase marketing spend as more people look for digital solutions e.g. Ed-Tech, Gaming
  • No costs are really “fixed”
  • Proactively work with landlords for rental renegotiations
  • No new hiring
  • Co-opt team leaders in identifying payroll cost solutions – be pragmatic but humane. Examples of ideas companies are thinking about vary from salary reduction, shifting to variable pay, salary deferral or worst case headcount reduction
  • Re-look at your product roadmap – rationalize long term projects
  • Discuss waivers and moratoriums for some expenses
  • Cut discretionary expenses down to zero
• Working capital management
  • Match outflows to inflow cycle as much as possible; if you don’t ask for concessions, you won’t get them
  • Avoid deferred payment structures that hit as a bullet payment and take the business down. Look at fundamental reduction in cash outflows and cash flow matching.