With the coronavirus now a worldwide pandemic, public health concerns and a global economic slowdown are wreaking havoc on almost every aspect of society. As individuals learn to navigate new norms of social distancing and remote working, startups and small businesses are looking for strategies to cope with the impact of the virus and an economic environment that is changing daily.
Startups and small businesses that make decisions and develop strategies for survival quickly in this rapidly changing business climate are more likely to survive than businesses that take a “wait and see” approach. This means founders and teams need to sit down every day to go through different scenarios. They’ll need to remain fluid and treat all strategies and decisions like innings in a baseball game. As new information comes in, the company moves into a “new inning” with strategies that best address changing business conditions.
The uncertainty surrounding this crisis and the importance of businesses being able to adapt as things change was captured in a letter Sequoia Capital wrote to its founders and CEOs. The investment firm called the coronavirus outbreak , warning “it will take considerable time – perhaps several quarters – before we can be confident that the virus has been contained. It will take even longer for the global economy to recover its footing.” The fund urged its portfolio companies to “question every assumption” about their business.
To survive the new normal of economic turbulence and uncertainty, startups and small businesses will need to examine all areas of their business from the capital to customers and everything in between to put themselves in the best position to weather the severe economic downturn.
Access to capital is the lifeblood of startups and small businesses. Unfortunately, one of the most immediate impacts of the economic slowdown is a scarcity of funding. Startups are finding that raising capital is extremely challenging as venture capitalists delay making investments during the crisis. Small businesses may also find that access to capital is drying up as banks tighten lending.
In this environment, startups and small businesses can potentially find their next infusion of capital by shifting some of their fundraising strategies to generate funding from friends, family, early investors, and even customers. Businesses should also revisit all loans. With interest rates remaining low, there may be opportunities to conserve capital by lowering payments.
Cash and expense management
Cash management is critical for startups and small businesses in normal times but is essential for weathering the economic fallout from COVID-19. Many businesses do not have experience navigating economic downturns like the ones seen in 2008 and 9/11. With no visibility into how long and how severe this downturn may be, it is difficult for business owners to understand the impact and the cash management measures needed to weather the crisis.
Startups and small businesses will quickly need to consider their cash reserves and lower their burn rate. This process should start by looking carefully at expense categories, assessing both fixed and variable expenses. Evaluating all business expenses is a critical exercise for businesses year-round but even more important in an economic downturn. Businesses should determine how much they are spending on fixed expenses like rent, payroll and insurance and how much they are spending on variable expenses such as marketing, utilities, and office supplies. Companies should assess which fixed expenses can be re-negotiated and which variable expenses can be reduced or temporarily eliminated. Once all expenses have been reviewed, it is a good idea to trim 10% or more if there’s an opportunity to do so.
For business sitting on cash reserves, this might be a great opportunity to get attractive pricing on overdue investments.
Another step businesses should take in this changing economic environment is to evaluate staffing numbers in terms of current needs versus forecasted needs. The uncomfortable reality of an economic downturn is the need to assess staffing levels. Ultimately, if the business is staffed for forecasted needs rather than current needs, an adjustment might be necessary. Businesses can cut costs and potentially avoid layoffs by delaying new hires, freezing current employees’ salaries and/or reducing compensation by scaling back work hours.
The digital transformation small businesses have been undergoing can help them weather the current economic downturn. As people are being asked or required to stay home, digital tools like bookkeeping and accounting platforms can play a key role in keeping businesses running.
Small businesses are turning to technology to automate accounting, bookkeeping and tax filing functions. These tasks are a source of frustration for many businesses even in the best of times and mistakes can have serious repercussions on business longevity. Fintech solutions are helping enterprises automate these repetitive processes, speeding them up while delivering improved accuracy and efficiency.
These solutions can provide small businesses and startups with the data and analytics they need to monitor the status of their company, allowing business owners to quickly make decisions as to the economic climate changes. For example, cloud-based accounting platforms can connect into bank account and credit card transactions to track expenses and cash flow, providing a clear picture of financial performance to better inform business strategy.
Cloud-based accounting platforms allow small businesses and startups anytime, anywhere access to financial data and information. Mobile access to data is imperative at a time when many business owners are working from home. With cloud-based bookkeeping and accounting subscription services, businesses can improve operations, save on infrastructure costs and gain the flexibility to scale up or down with business conditions – three very critical advantages in an uncertain economic climate.
To retain customers during tough economic times, startups and businesses need to be hyperfocused on customer service. A focus on customer retention should be a priority for businesses no matter the economic climate, considering that it costs six to seven times more to attract a new customer than to retain an existing customer.
Businesses can offer value adds like a free dessert with a meal or free shipping on online purchases to help cement customer loyalty in this challenging economic climate.
The economic fallout resulting from the coronavirus will test the strength of all startups and small businesses. Companies will need to be agile enough to adapt to a business climate that is changing daily while maintaining a focus on raising capital, managing costs and expenses, keeping staffing levels aligned with current needs, leveraging digital technology to improve operations and making customer care and service a priority. Companies that can do that will come out on the other side of this crisis with a stronger team and more loyal customers.