A version of this article originally appeared in Forbes.
Budgeting is never easy, but it can be especially stressful for CEOs and founders during times of economic uncertainty. For leaders who haven’t yet navigated a recession, learning from others’ experience can help build up the knowledge—and confidence—to make the tough calls.
I’ve previously shared Bruce Felt’s lessons from the Global Financial Crisis on my blog. We’ve known each other since 2006 when he joined a GGV portfolio company, SuccessFactors, as the chief financial officer. About a year later, Bruce took the company public—just in time to see SuccessFactors’ stock plunge during the GFC from $15 per share to a low of about $4. SuccessFactors ultimately weathered that economic crisis, selling to SAP in early 2012 for $3.4 billion (or about $40 per share).
Bruce is now the CFO at Domo, a cloud-based business management platform that went public in 2018. Though he plans to retire from Domo this year, Bruce is leading the company through various scenarios around budgeting.
Based on Bruce’s decades as a CFO, here are some budgeting tips for CEOs, founders, and other leaders who are navigating today’s macro uncertainty:
Seek input, but be ready to make the call
Whether it’s a board member, CFO, or another trusted leader, founders and CEOs should “get as many people who have seen this movie around the table,” Bruce says. But for the hardest decisions, avoid trying to get consensus. Instead, seek the right input to help you make the best decision that only you can make.
“The market has crashed 70%-80%. That’s just the way it is. We didn’t make that happen. It happened. Your performance didn’t make it happen. The market did it to you … Listen to your best adviser, and get input so you have the confidence to tell the people to do what you need to do.”—Bruce Felt
Preserve cash—even if you have to slow growth
If you aren’t already doing this, it’s time to pivot from planning around growth to planning around cash preservation. “Investors will understand that you made the trade-off [of growth] to protect cash,” Bruce says.
For small businesses with limited cash, cash flow matters the most; for bigger businesses with more resources, Bruce says, it’s all about operating margin.
- Aim to have at least 18 months of cash in the bank—ideally 24 months if you can make it work—and a fully funded business plan.
- Rethink your annual plan: Bruce relies on “a live model” that allows “making a call as often as we need to. We can adjust it every day if we need to.”
As an experienced operator who sits on both public and private boards and who also invests in venture funds, Bruce is currently modeling about 10 different scenarios for Domo with one constant: keeping the company’s operating margin positive.
“Committing to this operating margin under any condition means if the top line gets softer, we’d have to cut expenses more,” Bruce says. “Pick a number that you can live with, that your board can live with, that derisks the future where you don’t need to get more financing—that’s the holy grail. Grow as much as you can, but the constraint is that cash burn number.”
Rally stakeholders around one metric
Here are two ways to secure buy-in from the rest of your leadership team, according to Bruce:
- Consistently share critical info: From what investors are saying to what analysts are writing, proactively keep your key stakeholders updated about the macro environment.
- Execute around a base plan: Just as a football team may have 50 plays that it plans to run going into a game, Bruce rallies the whole management team around a base plan with many scenarios. If actual results begin to diverge from the base plan, the company can shift to another scenario without missing a beat.
“Scenario X is what we’re going for,” Bruce explains. “Scenario Y is how we’re going to manage expenses.” This spreadsheet of multiple scenarios analyzes what’s going on in the business and “gets the whole management team on the same page to make rapid-fire decisions, which is really what you need to do in this environment.”
Monitor other KPIs
During times of volatility, founders and CEOs will need to learn how to sift through a lot of “noisy data and non-patterns,” Bruce says.
Consider tracking metrics like:
- Gross renewal rate: Are you talking to customers at least six months ahead of the renewal date? Are you paying close attention to downsells? “If a $50K customer now wants to renew at $47K, that matters a lot in this environment,” Bruce says. “That’s like a non-renewal of a smaller customer.” For forecasting, Bruce recommends taking off 5 points as a “good starting assumption—then test the heck out of it.” For example, if you’ve been producing 90% gross renewal in past years, expect 85% this year.
- Pipeline creation: Is your company’s marketing funnel still healthy?
- Sales rep productivity: How many reps do you have? How ramped are they? What do you know about their tenure and expected performance versus actual?
- Product-market fit: Do you have a framework to help your team decide what to build? Will you lose renewals because you don’t release a feature? Based on his experience of selling to enterprise companies, Bruce offers some cautionary advice: “Just because a customer bought your product does not mean that you have PMF … It could be that your sales team has done a good job selling but the customer isn’t using the product fully, making renewals and additional sales difficult. Our product marketing people (instead of just sales) need to be on top of this to figure that out.”
- Frontline intelligence: “What are your reps hearing? Have annual payments become quarterly? For deal cycles, what is the customer saying? What terms are they asking for?” To get an accurate picture of an account’s status, levers like activity, usage, and unused licenses can provide helpful insights.
While experience can’t prevent any of us from making mistakes, anticipating common hurdles can pave the way for better decision-making. GGV itself was founded in 2000 so we’ve supported founding teams through various market cycles. We’re also fortunate to have a community of experienced leaders and executives like Bruce who have also faced previous downturns. Armed with these tactical tips and strategies, we hope founders and leaders feel better equipped to tackle the challenges ahead.