Insights
What to do in a downturn
Four steps to stay aloft without killing your long-term revenue engine
I once took on a Chief Marketing Officer role at a company that had just exited Chapter 11.
The company had everything going for it. It had emerged from bankruptcy with a rosy plan, new owners, and plenty of cash. The broader economy was strong. It was poised for a comeback.
But that’s not what happened. Sales plummeted and most of the management team left. A restructuring firm (my employer at the time) was brought in yet again to help turn things around.
So what happened?
While the courts and banks were busy avoiding liquidation and carving up the business, they mistook the company's vital revenue engine for an unnecessary cost center. The business had stopped investing in delighting customers. In fact, it had stopped reminding customers it existed at all.
When I arrived, the marketing staff for a $200M revenue consumer brand with thousands of operating staff had been reduced to a single (harried) director on a shoestring budget.
I wish I could say we turned things around, but the damage had been done. While a profound effort by interim leadership and front-line staff and an infusion of marketing spend helped stabilize things, the company was sold in distress and never recovered.
The lesson is this: Cutting sales & marketing in a downturn is like dumping fuel from a struggling airplane. It can help avoid an immediate crash, but lose too much and you’ll never go up again.
What, then, is a distressed company supposed to do when faced with falling cash flow? Here are four things we think about when entering an urgent situation:
A natural response to a crisis is to cut everything equally: “We’re in trouble! Reduce sales and marketing expenses across the board by 20%!”
This is bad. It forces leaders to eliminate spending that could actually be keeping you afloat.
If you can’t attribute revenue to specific sales and marketing efforts or don’t understand your contribution margins, figure these out immediately. Then stack rank and eliminate expenses that aren’t netting positive cash flow for every dollar spent.
As someone once said: The best defense is a good offense. This can apply to restructuring as well.
Cutting costs isn’t the only way to increase cash flow — in fact, for businesses with high fixed costs and a lot of operating leverage, increasing revenue is often far more powerful and less harmful in the long run.
If your analysis from the exercise above shows a subset of sales or marketing activities are highly effective at returning more cash than what’s put in, this is where to put precious dollars.
Speaking of cash — if your company is short on it, pay particular attention to the timelines involved.
GAAP revenue accruals and 'bookings' targets are now meaningless for you. Fast sales cycles are better, and fast payment cycles are better still.
Imagine a SaaS company that serves companies from small enterprises to the Fortune 1000. Cranking up SEM spend directed toward self-serve, smaller customers who pay by credit card will drive more short-term cash flow than hiring account executives focused on enterprise sales that will take 6 months to close and 90 days to pay… even if those AEs are profitable in the long run.
Your product, brand, and customer experience are the heart of your business.
Cutting R&D or eliminating large swaths of sales or service reps might be necessary to stay airborne in the near term, but these should be done with care and only in times of dire emergency, then immediately restored when things are more stable.
You can probably get by another year without upgrading your ERP, but shutting off product development and commercial functions will result in the situation described at the beginning of this article. You won’t need the new ERP if you don’t have any customers.
Better yet, instead of dropping fuel and vital systems, look for entire components that can be eliminated without harming the whole.
For retail or restaurants, this could mean selling unprofitable locations or real estate whose market value exceeds its value to you.
For B2B companies, this might mean eliminating unprofitable plants, products, or services.
It might also mean ‘firing’ or increasing pricing for customers who are cash flow negative when all expenses are accurately accounted for (way more common than you’d think).
Hopefully your employer or portfolio company never finds itself in distress, but if it does, don’t forget to keep the fuel tanks full and the engine running.
Ignite growth.
