5 ways SaaS businesses can extend cash runway during an economic slump
Time to take a close look at your finances.
Step 1# Cut all discretionary spend
The first step to understand your cash runway is to segregate the spend. As a scaling business, this is something you’d have done throughout but when a business reaches the point of preservation or conservation, the segregation of spend becomes a major issue.
[Read:We asked 3 CEOs what tech trends will dominate post-COVID]
Start by avoiding discretionary spending – the spending that one can do away with. Here is where there is a difference. In a pandemic-triggered recession, the definition of discretionary spending would change. For example, when expenditure on travel and entertainment is an obvious discretionary spend, in the current times, the office space could also become a discretionary spend.
There is also a way to bring down non-discretionary spends. At Chargebee we identified big-budget annual payments and renegotiated contract terms to match our inflows. We broke down our cash inflows on a weekly basis and matched the expenses to the inflows bringing down big-ticket spends. At a functional level, gather yourRevenue Operations Practitionersand eliminate tools that are redundant.
Step 2# Scenario planning
Around March 2020, McKinsey & Company tried predicting thedifferent outcomes of the economic impact of COVID-19 with these 9 different curves.
Bloomberghas also predicted other types of recovery we could be seeing in the coming quarters. Whether it’s a V-shaped curve or a ‘Nike-Swoosh’, these predictions call for alterations to your pre-pandemic plans.
Here is where scenario planning comes into place. It should be performed after segregation the costs to help refocus the budget. Ask yourself,
The answer to this question will vary depending on the type and size of the company but an organization should have at least four different scenarios planned out at any given time.
Step 3# Plan revenue goals for the scenarios
Moving to the other side of the spectrum, you need to look into spend to match the anticipated revenue goals. Here discretionary spending is not taken into account. It is advisable to not commit to this spend until things get back to normal.
As a measure to combat uncertainty, every finance leader should have a detailed plan on all the possible actions to take to reduce spend. Based on this, triggers and action items that need to be set in place.
AsDan Hockenmaier says, “Scenario planning is an exercise in deciding what to do before you get punched in the face.”
Scenario planning would help you understand how your company not only survives but thrives in different future scenarios for the country and its economy. Below is atemplate from Sequoiaon how to map out and maintain a 24-month runway amidst controllable and uncontrollable factors in the environment.
You probably don’t need all the fancy recovery curves but having a scenario matrix in place with precise internal and external triggers could give you clarity on choosing the path you need to take.
Step 4# Define your end point
When any crisis starts it is unlikely that the whole world shuts down. There are activities that keep the economy running even at a low pace of growth.
Generally, annual revenue targets are drawn out at the beginning of the financial year/calendar year but when there is a high level of uncertainty, these plans need to be revised every month or quarter depending on the severity of the impact for the business. This helps you take calculated decisions based on your spending patterns.
Step 5# Reforecasting to success
The final and most crucial step is reforecasting. It helps one stick to the plans. It also helps identify opportunities for growth and helps invest any excess funds in them.
“When you reforecast, you map the actuals to the scenarios. Which scenarios are you falling into? If you did really well, you have more funds to allocate elsewhere. This is critical.”
In our current times, macro-shifts are happening fast and micro-shifts within your business like up-sell or churn may still be slow. Speed of the company’s decision making becomes crucial and reforecasting on a quarterly basis helps do this.
Metrics in reforecasting
The following are the key metrics we use at Chargebee for the purpose of reforecasting.
How can a business plan its cash runway for the upcoming quarters?
If they do have it, then it is an indicator that they are on the right track of preserving and conserving cash.
To prioritize investments, companies should plan and consider the following spends,
You can also consult with your board members/investors and if necessary, look for alternate sources of funding in the form of investments (e.g. venture debt funding, angel investors, grants, etc.).
What are some pitfalls to look out for?
In the current scenario, there are two areas that need more focus.
Macro factors can’t be predicted. A year ago if anyone would have told us that we would be sitting at home working as remote teams, we would have made light of the whole situation. However, some truths are inevitable and unfathomable.
But, having good sources of investments available to tap in even when we might not have the need for it at the moment and maintaining 24 months plus cash runway at any given point should help any company manage their cash runway and emerge stronger from the downturn.
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Story byKarthik Srinivasan
Karthik brings over a decade of experience in leading and scaling financial functions for global businesses. At Chargebee, he is responsible(show all)Karthik brings over a decade of experience in leading and scaling financial functions for global businesses. At Chargebee, he is responsible for financial operations, strategic business planning, reporting, and consolidation.
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