Chris Mossa, Chief Strategy Officer at Graphite
Financial uncertainty is looming in today’s market, leaving many startups worried about the possibility of a recession, slow growth, and fewer fundraising dollars.
Recessions always hit early-stage companies hardest given their dependence on fresh capital to maintain operating capital and cash flow and fund growth. The margin for error is always tight for these businesses. But in a downturn, it can evaporate overnight.
Even if the economy stays out of a recession, you can never be too prepared. With tough times ahead, it’s critical to recession-proof your finances by first focusing on what you can control. If you do need to raise money, you’ll make a stronger case if you already have tangible progress to show.
If you haven’t started preparing yourself for a possible recession, now’s the time.
Maintain a Steady Cash Flow
During times of financial uncertainty, it’s important to have reliable streams of income beyond just investor funds.
Make sure you have an active collections process to keep money flowing in from customers on time. It’s easy to let late payments slide when things are going well, but these practices will hurt you in a more challenging economy.
Use modern payment processing tools like Stripe or Square to help clients set up automatic payments. This will ease some of your cash flow woes and ensure you’re not chasing late payments and putting your operations in jeopardy.
Understand How to Survive
When a recession hits, it might feel tempting to wait things out before making changes to your business. However, if you are too reactive, you could end up floundering rather than adapting.
As soon as you notice changes in the market, start responding proactively:
- Plan out what you need to do for your customers.
- Specify your growth goals for the immediate future, and focus on making those goals a reality.
- Cut any expenditures that don’t serve that mission and put your energy towards weathering the storm.
Prioritize Every Single Dollar
To run your business effectively in a challenging economy, you’ll need to understand exactly where every dollar is going.
Look at your gross cash burn and categorize all of your expenses into tiers based on how essential they are to your business. This helps you better understand where to make cuts as well as what you’ll need to invest in to survive.
Many startups don’t conduct deep financial analysis as part of their regular operations. If that’s the case for your organization, you may need to bring on a financial partner like Graphite to assist you through the process.
Plan For the Future With Our Cash Flow Forecast Template
Be Diligent About Vendor Expenses
Vendor management is another key step to recession-proofing your company. You need to understand when you’re paying each of your vendors and how that affects your cash flow.
Many startups pay their bills as they come in, rather than using a payment schedule based on the due dates. Being strategic with your payment schedule will help you buy time when cash is tight. Don’t make your payments early without reviewing your upcoming cash flow first.
Of course, you’ll want to make sure you’re still maintaining good relationships with your vendors and that you aren’t making payments late. Vendor management during a recession is a tight balancing act, but a necessary one.
Fundraise With Existing Investors
Fundraising is far more difficult during a recession or even in the run-up to a recession. If you’re nervous, assume investors are just as nervous. However, plenty of deals get funded in economic downturns—it’s just not as easy.
Start with who you know. Your existing investors don’t want to see you fail. They have skin in the game and have already demonstrated their support. Talk to them first and gauge their appetite for follow-up investments to help you manage the runway. Put the majority of your focus here and then go to new investors to make your pitch.
If you’re struggling to fundraise using traditional methods, look into non-equity financing options as well. Venture debt and revenue-based funding via platforms like Capchase, Wayflyer, and Pipe all offer alternative ways to raise capital for businesses with consistent revenue streams.
Recession-Proof Your Finances With Graphite
Although an impending recession certainly feels daunting, it’s important to remember that many startups have survived financial instability in the past to find success. Some startups even thrive during these times.
It’s possible for you to do so too—you’ll just need to be proactive with your finances. Having strategies in place ahead of time will help your entire team manage stress during these challenging times and guide your organization forward long after the recession is over.
As a startup-focused finance and accounting practice, Graphite has the tools to help entrepreneurs and management teams make smart business decisions during recessions and beyond. Find out how our team helps your startup create reliable and scalable financial processes.
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Born out of a VC fund, Graphite fully understands the strategic and financial needs of high growth companies. If you need accounting support or simply have a question about accounting at your company, feel free to connect with us!