Planning for growth hasn't gone away as companies navigate the downturn, but it amounts to a fraction of what it used to be, financial planning and analysis (FP&A) specialists say.
In normal times, a growth-stage company might spend half of its resources on initiatives that will lead to more business. But today, that ratio has likely dropped to around 20%, and the payoff window has shrunk from 12 to 18 months to three months or so, Nick Abraham, CFO of home furnishing company Resident, said in an Airbase webcast.
"It’s still important to experiment and invest," he said.
Watching cash flow
Growth plans have to take a backseat to survival plans, which means shifting the focus from the income statement to the cash flow statement, Abraham said.
To improve cash flow, you have to reduce expenses, which means negotiating with your vendors, contractors, and consultants to accept reduced payments.
"Literally, get a list of every single vendor and send an email or make a phone call and ask them how they can help you," he said. "It's important to be upfront and reasonable. 'Look, I want to pay your costs, but I need to defer these payments until later.' Or, 'This is how much I can do right now; let’s create a payment plan.'"
Given how quickly the economy is changing, trying to model multiple scenarios and create plans for each of them isn’t practical, said Andy Toung, a finance and operations specialist with Gusto, a small-business payroll and operations platform.
"It’s not realistic to have fully baked operating plans and expect everyone to be in sync with every detail of every model," he said in the webcast.
Instead, keep your eye on the three or four crucial variables and have a plan for when the performance of those variables shifts.
"Get deeper into those and have some sort of thought as to how they can go wrong," he said. "Then, importantly, plan for what you would do if that happens."
You can create a set of triggers so that when performance of one of the variables drops to a certain level, you automatically take an action: reduce the size of a team, for example, or cut a portion of the budget.
Abraham keeps his eye on the three to four variables that are crucial for his company each month and plans as if none of those variables is going to go in a favorable direction in the near term. That forms his worst-case scenario and he uses that as his base assumption.
"I wouldn’t even worry about the best case," he said. "I would worry about a case that would be, what do we need to do to survive if nothing goes our way?"
The switch from growth to survival also means cost-cutting, and though it can be tricky, avoid making indiscriminate, broad-based cuts.
"Start by asking, 'what's our strategy?'" Abraham said. "What's our operating model? Let’s build up the cost around those components."
By aligning cuts with your goals, rather than making across-the-board cuts, you're better able to bring others in the organization along. "That helps you get buy-in, because, otherwise, you're just pushing a target down on people," he said. "They either resist or they do it and are unhappy about it and create a lot of churn."
The downturn makes this a good time to make cuts you should have been making all along, Toung said. "You know there's stuff in your P&L that doesn't need to be there," he said. "Start there."
That's not to say those are easy cuts. Even something that appears non-essential, like staff lunches, will represent something important to someone.
"If you're saying, 'Hey, we're going to cut lunch once a week or something,' because it turns out to be a ton of money, that's fine for your engineers making six figures or people who don't have to worry about that," Toung said.
"But what if you're part of the team that makes, like, $40,000 [and living in a high-cost area like Silicon Valley], and it's actually a big part of your benefits package?"
Changes to planning
At Gusto, the normal planning cycle takes about ten weeks weeks: four weeks of pre-planning, two weeks for the annual planning meetings, and then another four weeks for operational planning. This year will be different, Toung said, because COVID-19 threw everything for a loop.
"Technically, we don't even have a regular planning cycle for the next six months," he said. "At least on the planning biz-ops side, we're still doing work that involves planning: forecasting, seeing how things are going, looking at costs. All this stuff is important. If you pair that normal activity with controls and agreed-upon not-business-as-usual things, that is how we’re trying to preserve cash and optionality."
Toung said the finance team normally checks in at regular intervals — a week, a month, or a quarter, depending on the team — but now they’re setting up trigger-based controls so actions can be taken without check-ins.
For instance, headcount won’t be automatically backfilled; if someone leaves, the position won't be automatically filled. "Even if the person is on a volume or velocity team, you can’t automatically backfill on that," he said. Volume and velocity teams are internal designations at Gusto referring to people whose work can be traced to increasing the amount or speed of new business.
"The controls process is going to be a lot heavier than normal," he said. "We're trying to make it as lightweight as possible, but anything heavier than what it used to be is heavier than normal. I think that’s important, because the amount of contextualization of information is not going to be very high across all parts of the company. So, we have to take a more centralized distribution of resources in this timeframe."
In short, FP&A operations are proceeding as they always have — analysts are modeling, planning, identifying growth opportunities as well as cuts — but adjustments must be made, at least until markets begin resembling something like normal.