There’s no doubt this is a very different type of downturn. We’ve yet to figure out how long it will be, how deep it will be, and what its full impact will be on different industries, our business, and our customers. Simply put, there really isn’t a playbook for this scenario.
However, when talking with customers and analysts, I’ve found this simple Goldman Sachs framework on how a CFO can lead and manage during a crisis to be very helpful. I’ve used this framework to build out Domo’s financial strategy, and in this post I’ve weaved in some ways you might want to use it.
1 – Set the tone for the business
Every business needs to think about the tone that is right for them. For Domo, the tone is guarded optimism. We’re optimistic because we support remote working and we see an increased need for management teams to have powerful data at their fingertips. At the same time, we all need to prepare for the worst. If we prepare for the worst and it does not come true, we’re likely in a much better financial situation and have the resources to be able to bounce back quickly.
2 – Get a handle on the macro-trends causing the downturn
One of the big challenges is trying to determine how bad or how long this downturn will last. Since the driver of the downturn is the COVID-19 outbreak, CFOs must keep an eye on how it develops.
To help with this, Domo built a Coronavirus Tracker that provides statistics on everything related to the virus, such as confirmed cases (updated every 10 minutes), testing and treatment, unemployment, and social distancing. The app even offers projections on how preventative measures will impact things like hospital resources. It doesn’t really give me a time frame, but I know if the numbers are getting larger, we are a long way from returning to “business as usual.”
3 – Determine which industries will be impaired
It’s imperative for CFOs to analyze and understand who is going to be impacted most. A good proxy for this information is to look at the percentage of companies that are putting a freeze on hiring or laying people off.
From a customer standpoint, this helps you determine your exposure to those industries so you can understand your own top line and credit risk. It also helps you determine the extent to which you should pivot your business and focus on the less impacted industries.
4 – Ascertain how bad your top line could get
Next, we need to understand what this downturn could mean to your business. For Domo, we modeled the impact on our top line based on 2008 Great Recession data from similar businesses. This data showed three down quarters before rebounding with a magnitude of the total decrease in growth—nearly a 40-point swing.
I created a basic model for Domo that allows us to hypothesize a new base case given the environment. Now, take note that in our business we also have a renewal stream that is much stickier and less impacted by the economy in the short run than new business. While the model is imperfect, it helps create a baseline for planning conversations as we look at alternative strategies.
5 – Model the business using different scenarios
With that as background, we as finance leaders need to model the business using one of the nine scenarios presented here. They range from a “Prolonged, Deep Recession” to a “Home Run.”
At Domo, we’re modeling based on the “Status Quo” scenario, which assumes the downturn goes through late 2020, that our industry outperforms generally, and the company keeps its basic position in the industry (even though I believe we are in a better position than our average competitor).
6 – Track real-time pacing, customer retention, and selling into current customers
One of the most important data sets I use measures how our new business is pacing against all prior quarters. This gives me a very good feel for how we’re doing and whether deal closures are being impacted by the new macro environment.
Rather than focus on targets, we need to examine how the business is pacing relative to one year ago. For example, if Q1 this year is pacing ahead of Q1 last year, that means you’re growing. What’s key about this information is that it’s near real-time. Even a 24-hour delay could be costly if things begin to deteriorate.
7 – Monitor cash flows and cash balance on a daily basis
The most critical metric is cash. Cash is king for almost any industry. In making your worst-case assumptions, you need to look at cash on hand, cash flow, and how to optimize cash during a downturn.
For reference, I keep the total cash on hand in addition to a list of outgoing payments. During a downturn, we must look at every spending item in the P&L including capital expenditures. Finance can work with the business to determine how to control or reduce vendor spend. We look at terms as well as implementing approval requirements for discretionary spending.
Hope for the best, plan for the worst
At the end of the day, much of this advice comes down to taking a conservative approach with guarded optimism. Every company must adapt to this new economic reality—and certainly there isn’t a one-size-fits-all approach.
If you’d like to hear more on this subject, check out my recent webinar, where I go into greater detail on each of these must-dos.