With all the chaos in the economic
and financial markets these days, largely around the impact of new tariffs, it
is causing unexpected and unfortunate turmoil for many businesses today. Businesses that used to be growing are seeing
declines, and businesses that used to be generating healthy profits may now be
experiencing losses. That can be a scary
time for the most seasoned executives, and even more so for startup executives
living it for the first time. This post
will help you figure out how best to navigate these choppy waters.
Why is This Happening?
Tariffs are typically very bad for the economy. Although it may raise revenues for the government in the short run, it raises the prices of goods and services that are imported from the countries in which tariffs are imposed. And right now, tariffs of varying sizes are flying around many different countries and industries, wrapping pretty much everybody into this “dust storm”. This means as importing costs go up with the tariff costs, either you will pass through those increases in the form of a higher selling price (which will lower demand and profits) or you will eat those increases at the original price (which will hurt your margins and profits). Neither is a good outcome for your bottom line.
What Are Your Options to React?
When profits are in a free fall, you really need to assess the situation and determine your best path forward. For many, that could include dramatically lowering your cost structure with layoffs or otherwise, to help extend your cash runway so you can live to fight another day. Whether you make these cuts, and the size of these cuts, is the conversation for today’s article.
Key Questions You Need to Ask Yourself?
In This Reduced Economy, Will I still be Profitable? This is a very important question. If you think you will still be profitable, then any cuts are optional depending on how high of a profit you want the business to generate for its shareholders. Maybe your shareholders will have a longer term perspective and will not want to “rock the boat” in the near term, if they see a viable path to recovery in the medium term. But if you are expecting losses, cuts may be your only option, unless you are sitting on a big pile of cash that can fund your newfound cash burn rate.
Do We Feel This is a Short-Term or Long-Term Hiccup? If you feel the impact will be short in nature (e.g., under a year), you may have a different perspective than if you feel the impact will be longer term in nature (e.g., over a year). But for issues like this, you don’t always have a crystal ball with which to perfectly predict the future. So be conservative in your thinking, assume it could be much longer than you think, and build in the appropriate cash cushions into your forecasts.
How Long is My Cash Runway? Your cash position will often dictate your best path forward. If you have enough cash to fund the next 18-24 months in a reduced sales environment, maybe you will be okay with no changes. But for most startups, they do not have the luxury of sitting on a lot of excess cash. So if you are incurring newfound losses and your runway is under 12 months, it is time to start chopping, as raising funds in this economic climate will be very difficult.
How Important is It to Retain Key Talent? In highly specialized industries, making cuts can be extra painful. You have invested a lot of institutional knowledge into your team, and you don’t want that to walk out the door unless you really have to. So your decision around cuts may be directly related to how hard will it be to hire their replacements down road. But be honest with your assessments here, not everyone can be the irreplaceable “Michael Jordan” on your team.
When Should I Make Cuts? As fast as humanly possible. The faster you cut, the quicker you start saving your cash, which will be a hot commodity in down markets like this.
How Deep Should I Cut? As deep as you can without putting the core of the business at risk. More is better than less, remember the deeper the cut, the more cash you start saving, again back to that hot commodity in these markets. In all cases, your cash runway will help you decide whether you are cutting 10%, 20%, 30% or more. But cut enough that you don’t have to go back and cut a second time down the road. The worse thing you can do to your staff is having them constantly worrying about the axe hanging over their heads in repetition.
How Will Cuts Impact My Culture? Yeah, cuts are typically not good for culture building in the immediate term. The remaining staff just watched all their friends and colleagues walk out the door under unexpected circumstances. They will be grateful they “survived”, but they will potentially be angry with management as the ones who dropped the axe. As long as you are 100% transparent with your team about what the situation was, how tariffs impacted the business, and that you didn’t have any other choice to save the company and their jobs. Hopefully, they are mature enough to understand the situation and culture will hopefully rebound over time.
Are There Alternatives to Cuts? Other than raising capital, you can get creative in how cuts are implemented. For example, let’s say you have a staff of 10 salespeople all making $50,000 base and $50,000 in commissions (at 5% of sales). Instead of cutting 3 people to save $300,000, you could change the compensation plan for all. You can move all ten salespeople to a “commission only” model (which keeps everyone with the company). That puts the onus on them to sell in order to get paid any amount at a higher 10% commission. But if they don’t sell, you don’t have the fixed overhead of their salary to pay. This may upset all 10 people instead of upsetting the 3 that would otherwise have been cut, which may have everyone looking for the door, but it is an option. The more you can implement a single action and be done with it, the better, as compared to solutions that drag out the pain for everyone over a longer period of time.
Closing Thoughts
Hopefully, you now have a better
understanding of how to navigate the current choppy waters many of us are
experiencing. Follow the guidance in
this post, and you should survive to live another day and best position the
business to weather the storm until the markets start to recover. Good luck and hang in there! This is never an easy topic to deal with.