In a blog recently posted on the BeaconCFO Plus website, I referred to a survey done by Protiviti that was featured on the CFO Network. Protiviti, a global consulting firm, conducted its “2016 Finance Priorities Survey” and found that CFO’s and other top level financial executives are looking at 2016 as a year to play defense. This defensive posture was likely formed by the environment in which companies find themselves. Although improving, earnings and cash flow are in many cases just returning to pre-2008 levels.
The CFO’s and top level financial executives included in the survey are for the most part from well-established companies. However, that begs the question: How do early stage companies play defense?
By definition, early stage companies rely on creativity and innovation for their success. “Creativity” and “innovation” are not words generally associated with playing defense. But playing defense may well be the smart play in 2016—a year that is forecast by many to be influenced by inconsistent consumer demand, the prospect of more interest rate moves by the Fed, and by a legislative agenda partially shaped by the 2016 Presidential election. So what might be a reasonable set of priorities for early stage companies trying to become more successful in a “defensive” year?
- Stress test your forecasts—It is not unusual for early stage companies to prepare a somewhat limited set of forecasts. By limited, I mean the width between a best case and a worst case scenario. We need only to think back to 2008 to see what a truly worst case scenario can and did look like. Seriously question each assumption that underpins your forecasts and diligently work through how you would respond in each situation.
- Develop a thorough understanding of your cash flow drivers—Whether utilizing your internal team or outside resources, ensure that you have a detailed understanding of what drives the company’s cash flow. This includes developing a pricing protocol that is sensitive to market competition while still maintaining appropriate margins. Additionally, possessing a complete understanding of the company’s cost structure along with what cost levers can be pulled in difficult times is essential.
- Solidify your relationships with your investors—Whether it be friends and family, angel or venture capital sources, make sure that you frequently communicate with your investors. Share as much data with them as possible and supplement it with a clear articulation of what you are seeing in the market and what actions you are taking to enhance the company’s success.
- Ensure that you are getting the advice that you need—In uncertain times, many leaders of early stage companies tend to “hunker down.” That is to say, to shut out anyone who is not directly involved in the company and to devolve further into working in the company not on it. It is exactly during times such as this that having good advisors is critical. This is the time to seek out the suggestions of your Board of Advisors, CPA, legal advisors or other outside professionals.
Determining exactly what 2016 will bring in terms of economic activity and profitability levels is an educated guess. However, preparing your early stage company to focus on “the defensive side of the ball” can provide significant downside protection while increasing the likelihood that the company will still be on the field when it is time again to play offense.
About the Author
Tom Gentile is a Partner with BeaconCFO Plus, LLC (www.beaconcfoplus.com). BeaconCFO Plus provides targeted CFO services to clients in all aspects of strategic, financial and operational management. BeaconCFO Plus brings structure to the business and allows the owner or management team to return to the core of the business where they can utilize their specific areas of expertise to successfully grow the business. The firm provides services to two markets—individually-owned companies frequently with annual sales of $2 million to $30 million and portfolio companies owned by private equity firms or family offices.