How do we navigate through a period where we know our revenues are going down, but we don’t know yet by how much, or for how long? No one can predict when business will return to the pre-pandemic state. We know we have to cut expenses, but what’s the right reduction target to be aiming for?
As discussed in our Wartime Leadership series opener, we all lack clarity for answering these big questions. This uncertainty in turn drives hard decisions around how deep to take cost reductions – especially when it comes to laying off team members.
By now, many companies have already taken their first round of cost cutting yet remain more than a little uncertain if they’ve gone deep enough.
This post offers a methodical approach to defining a basis for forecasting the 2 most critical items on a CEO’s list: revenue and cash. The basis behind what gives visibility to revenue and cash drives how deep our cost cutting measures have to be to stay alive – or put another way, our survival assumptions.
We’ll start with the revenue forecast since that factors into cash flow planning and is also the harder to define through this fog of war. We’ll also presume you’re a B2B company not expecting a quick rebound once stay at home orders are lifted since the pace of restoring revenue depends on a combination of factors you have little control over.
With so much diversity across industries, business models, company profile etc., it’s not feasible to suggest a universal model that works for everyone. I’ll instead highlight a few process steps that may help steer your forecast towards being realistic and sufficiently fluid so you can guide decisions as circumstances change.
Throw out the peacetime budgeting process
If you’re running an established business with a history of operating and sales team metrics, you’ve already got a defined process to approach budgeting. In peacetime, this is typically a CFO led exercise beginning with past baseline and trends passed to each operating exec. Execs and their departments add updates without necessarily having company wide guidance on macro trends or big picture external forces to consider.
Since how and when businesses recover from the pandemic will be all over the map (including impact on your customers reeling from pandemic losses themselves), the wartime approach has to take in a lot of non traditional input, gathered in a consistent manner so the findings can be rolled up and examined holistically, as opposed to each department viewed within its own silo.
Get outside the building to gather new data
Gauging the extent of unknown external forces is what makes for the wartime exercise here. Relying only on what you know from inside the company would be like guessing how many troops you’re dispatching to battle before assessing the size and positioning of your enemy.
Wartime CEO and serial entrepreneur extraordinaire Steve Blank says “There are no facts inside the building so get the heck outside.” This means dividing the team up with specific missions to go out and grab external findings from customers and prospects. When synthesized, these findings paint a more complete picture of the forces shaping the uncertain world your company is interacting with.
Sample discussion points might include:
- How are different customers and prospects affected by Covid-19?
- Which geographies and/or industry segments are they most worried about?
- Are they reducing staff?
- Do they need to modify their buying plans with you now?
- What changes can you make to help them?
- Which trigger points or trends is the customer watching as leading indicators for where their revenue is headed?
With pandemic restrictions precluding in person visits, you won’t get a grasp of what’s happening with your customers by sending out email surveys or expecting them to give you online feedback. In wartime it’s the human contact that matters, now more than ever. Not only to get a response, but also to coax a bit more information out than they would not likely provide other than through one on one real time contact. If they don’t answer your calls and personal outreach, then that itself is a signal worth tracking.
Orchestrating a tight script with relevant questions is a large, manual task involving a broader portion of your team. A good script that you can deliver increases the number of data points and gives you a better handle on trends and findings.
Making sure everyone gathers input off a similar script increases value. This includes front line account managers, sales team members, and other managers and executives working in a coordinated fashion. Consistency of information capture is also important. This could be a scoring system in which account revenue projections are qualified with relevant comments (+ and -) that are also shared in a group exec team discussion as part of the roll up process leading to a consolidated forecast decided by the CEO and CFO.
Throughout the customer outreach at all levels, keep pressing for ideas that point to key leading indicators signaling strength of the account’s expected revenue. If you’re able to spot assumptions behind individual account forecasts, a pattern may emerge that can be distilled to a few core measurements for your revised overall company revenue forecast. These measurements will help in articulating the company plan to your board or possibly alternative financing sources. And they will now be supported with quantified assumptions which can be tracked over the coming months so you can update the forecast as the recovery unfolds.
Let the cash forecast drive cost reduction planning
At the same time you and outward facing team members are speaking with customers and prospects, the finance team can be pedaling hard on collecting payments already due, tightening up credit policies that might lead to reducing or eliminate credit, building cash reserves by drawing on available lines of credit and mapping out other debt options in addition to grinding through the process to file for the government sponsored Paycheck Protection Program and Disaster Recovery Loans you might qualify for.
Focused discussions should also be underway to identify an expanded range of cost cutting options. Following the kick off exec team session to generate an initial list of options, individual execs meet for a detailed drill down with the CEO and CFO. These interactions are less about making decisions on the spot as it is to spark and nurture ideas, and also note who is contributing in ways that look beyond protecting their own turf in suggesting creative options that make sense for the entire company.
While some of the obvious cost cutting might be implemented immediately, finalizing layoffs are best deferred till after you’ve got all the information put together from the updated revenue and cash flow forecasts. It’s only then that you arrive at the stage of showing the projected cash burn compared to your previous budget so you can then hone in on the amount of cost reductions needed.
Layoffs are the most drastic measures and should be undertaken after a great deal of thought. That being said, once the decision is made, it is best to act quickly and do in one single shot rather than creating waves of layoffs. Dribbling out layoffs over time is a sure fire way to damage your leadership credibility, destroy morale/impede productivity and increase the outflow of the very people you want to retain.
Active leadership matters
Wartime leaders are visible and hands on throughout all these steps. Everyone in the company is looking upwards to see how involved the CEO is. This is not a time to isolate and speak only with investors and executives. Team members are already aware the virus has severely disrupted the business, so there is a heightened sensitivity about whether their own job is in jeopardy. This is the time to step up interactions at all levels by taking part in team meetings and selectively engaging in 1:1 follow up discussions after the group meetings.
Asking questions and getting input from the front line team demonstrates through your actions that both assessment and decisions are being approached methodically. Your personal interactions will also prompt chatter through the ranks – which in turn spurs greater cooperation in driving the information flow upward so you can build the right set of survival assumptions that become your instruments for guiding key decisions through the uncertain times ahead.
Next post in this series goes into the hard decisions around positions, people and process for affecting a layoff.