Unfavorable economic and political conditions usually have a major impact on your business operations and revenues.
A sudden change in policies can directly affect your manufacturing costs. An unforeseen crisis can quickly plummet your product demand and supply. Even a slight shift in the consumer behavior can significantly hurt your monthly sales.
While you can easily recover from short-term changes, you’d find it difficult to manage if the situation continues over a long period.
When a global crisis slows down the market activity, small businesses and startups generally take the worst hit. Since their market positions are unsteady, to begin with, they’re the ones that go down first.
However, that doesn’t mean you can’t prepare yourself for adverse situations.
As a startup, you have the distant advantage of adapting to the changes quicker than large organizations. If you take preventive measures and carefully manage your cash flow, you can come out with little damage and make your business profitable.
In this article, I have listed down what strategies and tactics you can use to sustain your business and thrive in an economic downturn.
1. Find Alternative Financial Resources
Running out of cash is the first reason most startups don’t make it in the unfavorable economic environment.
New businesses typically need 18 to 24 months to reach the breakeven and start generating monthly revenues. But even then, it would take an average of three to four years to turn your venture profitable.
If you take into account the slow economic activity, it’s safe to say, you can’t fully rely on your monthly sales to sustain you for long a period.
In an ideal environment, you would have venture capital options to periodically inject to keep you stable. But an economic downturn might make it difficult for you to secure investment for your business. So, it’s better to find an alternate source of cash as well.
There’re two ways you can increase your cash inflow.
One. You can avail yourself of government aid programs.
In the aftermath of the pandemic, a lot of countries have introduced campaigns to support small businesses and startups. France issued 4 billion liquidity funds to help startups survive the economic conditions. Germany offered their custom plan to accommodate versatile ventures. US President has announced grants for small businesses.
If your city/country has launched any such plan, take advantage of it.
The second option is to reduce your stock value to attract investors. Once the economic condition settles, you can focus on strengthening your company’s position.
Consult your financial advisor. They can explain the technicalities to help you understand the pros and cons.
2. Conserve Your Cash Runway
Cash runway is the balance in your bank you’ve set aside for your monthly spending.
Every Startup keeps enough amount to burn for at least six months in the case their next round of funding delays. It’s a contingency plan that buys them time until they receive the funding.
It also acts as a cushion that can help you brave the worst economic situation. You can survive on your cash runway to wait out the storm.
If your alternative source of income doesn’t work out, consider cutting down your operating expenses to conserve your cash runway.
Generally, the first solution that comes to mind is to reduce your human resources. Laying off is the MO of large organizations, and it delivers them the results they expect.
It, however, may not work well for startups like you.
Because, unlike large companies, small businesses keep a skeletal crew, so to speak. Each individual takes more than their share, and laying off might hurt you more.
Instead of reducing your labor, you can shorten the working hours to save costs.
You can also cut non-essential spending you can do without. Such as trying franchising to reduce distribution costs, going remote to save rent prices, and diversifying your vendor list to find the best bids.
There’re also tools like Startuprunway.io available in the market that can help you manage your cash runway as well. They offer pre-defined models, scenario templates, and charts to optimize your budget.
3. Manage Your Liabilities
Prioritizing your liabilities in times when you’re already facing budget constraints may appear an unrealistic expectation but trust me, it can save you from bankruptcy.
As you know, debt financing is one of the primary sources of funding startups consider when they’ve sufficiently established a portfolio. It allows them to preserve their ownership and grow their operations at the same time.
But while it does have its advantage, it comes with variable interest rates that go up with age. Make too many late payments and you could end up with a pile of outstanding amounts that would force you to liquidate your assets to recover them.
It’s simply prudent to set aside separate funds for monthly loan payments to avoid that scenario.
Another thing. Try not to take new loans during the recession. If you feel there’s an absolute need for borrowing, consider choosing venture debt over bank loans.
Venture debt follows a different set of rules than banks. Where traditional financial institutes provide loans based on your cash flow health, venture debt creditors offer funds based on your business potential alone.
While the latter is more expensive than bank loans and also takes a certain portion of your equity, it’s more flexible and gives you enough working capital to pay off your debts on time.
4. Adjust Your Business Model
The recent pandemic has brought with it a lot of changes in consumer shopping behavior. Now people prefer online shopping and pick products and services that are easy to buy.
The sudden shift in behavior has forced tons of businesses to either shut down, merge or adjust their model to accommodate their buyer’s preferences.
If you’re facing low sales and trouble acquiring new customers, you may have to evolve your business model as well.
You’ll find tons of successful real-time cases for inspiration.
For example. Automobile company David Dodge, after struggling with the negative impact of the pandemic, reshaped its business model from in-person cars dealing with online delivery. The move earned it 58 new sales within a month alone.
Chipotle Mexican Grill followed the same strategy and introduced a pickup business model to make it easier for its customer to buy fast food without waiting in line. The re-vamped operations were such a success it re-hired over 8000 employees it was forced to let go in the initial months.
Badi is another good example. Since rentals were one of the most affected businesses due to COVID-19 restrictions, the startup had a hard time attracting customers. It adjusted its model and began offering short contracts and more security as an incentive.
Explore what strategy your competitors are applying, and try re-shaping your business model to best serve your target audience.
5. Invest in Technology
Technology is another factor you should consider adopting to make your business profitable in the economic downturn.
SaaS tools market has already been flourishing in the last decade for their efficient and productive use. But post-pandemic, the demand for information technology has increased drastically.
Since after the health crisis, organizations were unable to sustain a large human resource pool, many adopted SaaS tools to compensate for the gap in the workforce. The change in shopping behavior also propelled a lot of companies to buy productivity tools to keep their business running smoothly.
It has worked surprisingly well for others, allowing them to not only survive in the economic downturn but thrive as well.
Olivia is a great example of it. As a health care startup, Olivia offers therapy sessions and expert suggestions to people suffering from mental stress.
When the cities went into lockdown, the founders realized offering in-person therapy sessions may not be a sustainable option. They quickly switched to tech solutions and launched online therapy. Their innovative approach turnout to be the best decision, and they have been using the same model since then.
If you haven’t adopted technology yet, it’s high time to introduce one to make your operations more efficient.
6. Revise Your Marketing Mix
Brands typically invest a minimum of 12% of annual funds on marketing.
But as a startup, I am assuming you must have set aside a bit more for brand awareness and aggressive product promotions as well?
Take out some of that investment to temporarily fund your cash runway.
Marketing, undoubtedly, plays a vital part in ensuring your company’s success, but it’s a highly flexible department. You can easily cut down your budget and still run advertising campaigns.
For example. You can replace expensive commercial ads with low-cost social media video Ads. Social media videos are powerful promotion tools that almost 92% of $500 million revenue earners use to increase their product visibility.
Another option is to pull back print media in favor of email marketing. Over 40% of brands have switched to emails post-pandemic to save their costs, and out of which 78% have seen great improvement within 12 months.
You can also choose to go for omnichannel promotions to generate leads and increase site traffic. 72% of customers prefer brands that reach them out through multiple media channels, and nearly 64% go through several contents before making a purchase decision.
As a startup, you have to rely on a marketing mix to continue thriving in the post-pandemic situation. Digital platforms simply offer you budget-friendly advertising solutions to make that happen.
Revise your strategy and focus on cost-effective channels to reduce your marketing expense.
7. Decentralize Information Flow
Most companies usually fall under two types of hierarchies.
A centralized operation where only executive management takes part in strategic planning and a decentralized approach, in which the decision-making power is distributed down the line.
While centralization offers more control over the flow of information, a decentralized structure delivers faster and more efficient results.
Chris Argyris, a Harvard professor, and business theorist called it a double loop of learning. He wrote an article in 1977, explaining that decentralization gives certain transparency to the business. It helps you get multiple eyes on your goals and evaluate poor plans early on so you can timely improvise them.
As a startup, your hierarchy system would probably not be developed fully, but you can decentralize the flow of information in your organization to get the same outcome.
Lower-level managers typically have more “street” knowledge of your products and operations, and they’re better equipped to execute them well. Involving them in major decisions would boost their morals, generate more ideas, and optimize your budget.
It will also give you a competitive advantage, allowing you to survive the negative impact of the economic downturn.
The above chart is proof of it. The chart displays the performance data researchers collected during the recession period. It shows decentralized firms comparatively fared better when faced with adverse conditions and slow economic activity.
The recent pandemic has taught us how even a health crisis can have a devastating effect on businesses.
In the last two years, 70% of the companies bore the brunt of the economic downfall and out of which only 25% of them escaped any side effects.
While the number may be upsetting, the 25% success rate does show that you not only can survive in the economic downturn but generate adequate revenues as well.
As long as your company’s model is flexible enough to adapt to unexpected changes, you can beat the odds and run a successful business in unfavorable conditions.