The economic downturn of the late 2000s left a lasting impact on many professionals and business owners, especially those who lost their jobs or were forced to shut down.
With everything taking place in our current economy with COVID-19, we’re seeing millions jobless, forced to stay home, & many businesses unable to even be open. If you're worried about your financial future, follow this advice to shore up your business and its cash reserves while the economy has yet to crash.
Understand your main source of capital
In the middle of a recession, you may find yourself forced to cut costs in smaller windows of time like days or weeks, instead of months or quarters. This may lead to hasty errors, many of which can be avoided if you start preparing now.
Recessions are not the right time for executives to discover that it's hard for business management to quantify and analyze external drivers of performance. Differentiate the value-driving portions of each business area from the areas where costs have not scaled intelligently or as expected.
I recommend using a "headwinds versus tailwinds," or "risks versus opportunities" framework to quantify both the factors hurting performance (i.e. competitor action, input price inflation, etc.) and the actions you will take to counteract the shortfall.
Pay off your debts as soon as possible (don’t get new debt, unless it’s apart of the CARES Act)
Businesses often need to go into debt to finance their operations, whether it's by borrowing money or charging company expenses to a credit card. If you currently owe money for your business, make an aggressive plan to pay it off as soon as you reasonably can.
If we hit a recession and you're maxed out on debt, you'll have limited access to cash and minimal investors. Free yourself from debt before a recession hits.
However, with the new CARES Act bill, a lot of debt has been pretty appealing. For instance, the SBA is giving $10K of FREE money to small businesses impacted by COVID-19. That INCLUDES real estate investors! Granted, at this point, I’m sure they are almost out of the allotted $350 Billion. But, there has already been talk of more funding being released, so don’t waste time and apply now!
Before you resort to debt, outside of $10K of free money, I recommend evaluating your budget and seeing where you can cut costs immediately. It’s the easiest, most cost effective thing you can do in a time of crisis for your business.
Explore recession-proof business models and opportunities
Economic recessions impact specific companies and industries differently. Pay attention to the leading indicators and key metrics for your particular business and industry, and also set yourself up to explore other business opportunities.
Focus all your efforts today on your products/services that are a need, rather than a luxury for your customer base. If you’re a real estate investor offering things like swimming pools, spas, valet parking, high speed internet, cable tv, gyms, etc. then now is a good time to cancel such amenities in order to hoard cash.
So what industries and products are recession-proof? Well, what once would’ve been recession-proof, might no longer be. Such as the food and beverage industry. You would think that people will always be eating out regardless of the economic cycle, but not with a deadly virus lurking in the air. It makes us rethink everything we thought we knew about the economy.
New recession-proof business models are delivery options, internet-based companies, websites, working from home, good customer service is always a good one, take-out if you’re in the food industry, among many others.
Pay attention to your numbers
The best thing you can do for your business, during good and bad economic periods, is have a thorough understanding of your financial numbers and projections. Creating a detailed plan of projected income and expenses at the beginning of each year will mean the difference between thrive & dive.
Run your numbers and give yourself a top-level bird's eye view. Even if you start with an estimate that’s a little bit off, that's better than going into the year without a plan.
Business owners should always look to further develop, expand and diversify revenue sources, while remaining as efficient as possible through operations and expense management.
Pay attention to your financial statements. Emphasis needs to continue on revenues, but expenses need to be scrutinized, and reductions, while always difficult, need to happen for the benefit of the organization. Even during the Great Recession, well-managed companies of all sizes continued to survive and thrive by making changes and improving their companies.
Raise capital from investors
Most articles about raising capital were written during times of economic expansion. Most likely, during the past decade. Many of the entrepreneurs raising capital today have never experienced a recession either because they are too young or because it’s been quite some time since we’ve had one here in the United States.
To say that most entrepreneurs may be unprepared for this eventuality is an understatement. Entrepreneurs need to prepare for a recession and need to know how to raise capital in a down market. One of the best ways to do so is to prepare beforehand. When the economy is strong, you have the most options. Exploit them.
Even if you are prepared, raising capital in a down market can be incredibly challenging and even confusing. First, entrepreneurs need to prepare beforehand by establishing a clear defensive moat around their business metrics with a strong focus on profitability. Investors respond positively to this in down periods given that so many of their other portfolio assets, such as stocks & bonds, are in danger of going into the negatives.
Second, entrepreneurs should be flexible on terms and valuations understanding one important fact. Capital is more important than anything else. Even if entrepreneurs need to take a lower valuation with more dilution than they anticipated, it shouldn’t matter.
Be proactive. Prepare beforehand. Focus on profitability.
When the economy is strong, raising capital can be incredibly easy. But in a recession, it can get tough. That’s why the best thing to do is to shore up your position when the economy is roaring so that you are best prepared.
The first thing to do is to ensure that you have a strong cash position with clear runway to ride out a storm. Be relentless in your focus on cutting costs and streamlining operations. Eliminate side projects, new ventures, or other under-performing business units that are not contributing to the core value of your company’s product. Restructure personnel so you can focus all of your colleagues to perform at the top of their profession or license.
Secondly, you should seek to get to profitability by any means necessary. In strong economic times, profitability is prized by investors because it indicates the health of a business with or without venture investment. In a down economy, when growth and profitability are ever more scarce, having a business in the black can place you in a very small elite set of entrepreneurs.
There are numerous ways of reaching profitability. One particular focus should be on the margins of the cost of delivery of your product. Take a hard look at the unit cost of delivery of your product or service and make adjustments as necessary. Further, you can cut sales and marketing expenditures in order to immediately put your business in the black. While you may be sacrificing growth by cutting marketing expenses, the decision may be warranted given the nature of the economy and what’s best for your business.
Accept more dilution to survive
When raising capital, entrepreneurs and investors often negotiate over the valuation of the business. Investors are trying to minimize the valuation in order to maximize their percentage ownership while entrepreneurs are trying to maximize valuation in order to minimize their relative dilution.
In a strong economy, entrepreneurs usually have the upper hand as valuations are being driven up across the board and investors have less power in negotiations. Conversely, in a down economy, investors often have the upper hand as there is less capital swirling through the market.
Entrepreneurs need to get comfortable with accepting a lower valuation, and thus more ownership dilution, in a recession. This is especially acute when a business has a short runway of capital and needs an infusion of investment to survive. In this predicament, entrepreneurs will usually take whatever lifeline they can get.
What entrepreneurs need to focus on is the end goal; the survival and eventual successful exit of their business. Recessions are cyclical by nature and entrepreneurs can make up for lost value at successive rounds once the economy improves. More importantly, the discipline taught during these periods can make for massive financial returns down the road.
If you can't raise capital today, do what you can to survive until tomorrow.
During a recession, raising venture capital becomes significantly more challenging. If you find yourself in a position where you need to raise capital in a down market, there are a few key lessons you can take to heart. First, you should do whatever you can to cut costs and preserve liquidity in your company/investment. Second, you should focus on achieving profitability. Lastly, you should be comfortable accepting more dilution in ownership.