GSP Financial and Advisory works with a number of emerging companies in the D.C. region, many of whom are affected by the COVID-19 outbreak. Over the past week, it’s been a constant stream of calls, emails and texts from our clients in regard to what they should do.
Make no mistake, this is something rarely seen before and as such, it’s appropriate for us to share the same thoughts with the D.C. region entrepreneurs that we shared with our clients, many of whom have lowered their financial risk by implementing a few of the ideas below.
There continues to be a lot of speculation about how the COVID-19 outbreak will impact business, some predicting a Black Swan event, which is an unexpected event that causes a massive impact and heavily influences global activity (think of the 2008 recession), and others predicting a short-term economic blip that won’t impact the majority of business. Regardless of what your thoughts on the outcome, right now, it’s imperative you consider assessing the financial risk to your company and develop a plan.
When assessing risk, it’s important to think in scenarios. For example, what would happen if there was a vaccine, or if the virus went away like a flu? Thinking about scenarios helps you develop a plan of action. When going through the various scenarios, always focus on how your decisions impact your cash on hand. Our president’s first major address to the country on the outbreak sparked a level of fear in the financial world that’s going to impact a good number of us. In the venture world, we’ve had a historical run of higher valuations, easy raises, etc. that will all significantly slowdown now and capital will be extremely difficult to find.
It’s not all doom and gloom, though: Sequoia Capital, recognized as one of the top venture firms since all the way back in 1972, investing in the likes of Apple, Google, Instagram and WhatsApp, had this to say about the COVID-19 outbreak’s financial impact in March 12’s AngelList Weekly:
“Many of the most iconic companies were forged and shaped during difficult times. We partnered with Cisco shortly after Black Monday in 1987. Google and PayPal soldiered through the aftermath of the dot-com bust. More recently, Airbnb, Square, and Stripe were founded in the midst of the Global Financial Crisis. Constraints focus the mind and provide fertile ground for creativity.”
All of these successful companies spent time assessing financial risk and developing a plan during the uncertain times they were in. Which is the same situation we’re in now.
In talking with our clients, other CFOs and those in the venture capital world over the past few weeks, and in combination with our own experiences over the past years, we’ve been able to gather ideas and strategies on what to do, some simple and some complex and time consuming. You should consider adding these into your plan:
- Implement expense control measures now. If your employees are now working remotely and your offices are empty, consider contacting your utilities, cable, phone, etc. to limit services temporarily.
- DON’T assume slashing employee head count is the right action. Depending on the length of the situation and economic impact, you might find yourself looking to hire again. If you’re in an industry with a tight labor market, you might find a limited supply of talent to bring back into your doors. Think of other options, such as suspending bonuses, temporarily reducing pay and hours in combination with offering other incentives.
- Enable paid sick leave. Most companies don’t have a policy. Put one in place now. You’ll start to see this becoming a larger problem with those companies with a large retail presence. Generally, companies with workforces that have the ability to work remotely don’t need a robust paid sick leave policy, but again, that will vary based on the company’s industry, culture, people, etc.
- Cut advertising/marketing. Take a hard look at your marketing spend. You might find that your customer lifetime values have declined, in turn suggesting the need to rein in customer acquisition spending.
- Be prudent with capital spending (i.e. computers, equipment, build-out costs for a new space, etc.) and examine whether your capital spending plans are sensible in a more uncertain environment.
- Prepare to survive tough sales. Be forewarned that sales might just fall apart. Deals that seemed certain may not close.
- Look at your outstanding bills and payments to reduce risks to your balance sheet. Watch closely whether business customers delay payments and, if necessary, offer discounted rates for early payments, which is easier with a healthy cash position.
- Set weekly/monthly cash collection targets, and make sure you avoid billing errors so business customers don’t use those as an excuse to delay settling their bills.
- Extend payment terms to reduce pressure on suppliers. This might make sense for some companies, but requires careful case-by-case analysis.
Remember to always monitor your cash balances and make sure that you have working capital. The key element is to not be dependent on the availability of external capital, always asking yourself, “How much cash do I have right now?” and “What happens if my customers don’t pay me when I’m expecting it? and “Can I really go get cash easily?”
One final note: You’re all entrepreneurs and as such, understand risk, and you are where you are today because you assessed risk and had a plan. So the above isn’t that new to you! Put a plan in place now.