Bracing for Economic Pendulum Swings – How CEOs and CFOs Can Prepare Together

We all know that the macroeconomic outlook oscillates between faster periods of growth and slower periods, or between growth and contraction. For this reason, economies are often described as pendulums swinging back and forth in some kind of endless but steady and predictable pattern. People like to think of economies in this way to make them feel more predictable and easy to understand. But the truth is, economies are often chaotic and surprising.

In fact, the current macroeconomic downturn reminds me of a different kind of pendulum altogether – a Newton’s Cradle.

We’ve all seen one of these devices on someone’s desk and played with it for a few seconds. The reason I bring it up now is because only a few months ago, the economic party was at a high point – valuations were high, cash and funding were easy to acquire, and the macroeconomic outlook was rosy.

But then, the pendulum swung back, and just like a Newton’s Cradle, it didn’t just glide the other direction, but rather shot back with high energy – inflation spiked, growth went negative, funding dried up, and then the layoffs came.

And here we are.

So what should companies be doing in this situation? What kinds of conversations are CEOs and CFOs having in every office across America? 

Find Balance

Usually, when economies are performing well, there is tension between the CEO and the CFO. The CEO is pushing for growth and the spending that usually entails, while the CFO works to keep costs under control. This is a natural and needed balance.

But now, there is no disagreement. There is a clear understanding of the need to cut costs. So, our first piece of advice for anyone managing this downturn, is to make sure there is agreement between the CEO and CFO. Whether that means deep cuts, or only more modest adjustments, it’s important for management to be in sync to demonstrate leadership and confidence to the rest of the company.

Set Priorities

Your priorities will be different depending on what stage your company is in. If you’re still a very early stage company, you will likely need to prioritize R&D. If you’ve already achieved Product/Market Fit, then marketing and sales will be key. If you’re an even more advanced or established enterprise, then you may have more flexibility where to focus.

Get Visibility

This is critically important right now. For too many companies, even if they want to cut costs, they aren’t sure where they can do so. Sure, it may be easy to make the obvious choices such as cutting media spend, or in more extreme cases, choosing layoffs. But, without visibility into where your company’s unnecessary costs are coming from, those cost cutting measures won’t be strategic.

Even worse, without that visibility, your business is likely to repeat the same mistakes heading into the next downturn. Management teams need to remember that spending can’t be recovered. Once the money is spent, it’s gone.

Formulate a Plan

If the CEO and CFO have sat down and now agree on the nature of the steps needed and the adjusted priorities of the company – the next step is to formulate a detailed action plan to deal with the downturn. This means determining not just where to cut, but how much. It also means determining a schedule and setting KPIs to measure the effectiveness of your plan. Additionally, your plan should be graduated, meaning it should have milestones both for renewed growth or additional economic slowdowns and have additional plans in place for when those milestones are hit.

You can believe that I’ve been doing this with our CEO, Oded Zehavi. In fact, some of the steps we are planning to take follow the outline that he presented in a conversation with Entree Capital. One of the most important principles he identified is the need to avoid cookie-cutter steps: “Don’t use any templates – think about YOUR business … For many companies, the easiest way to make budget adjustments is to put a line on everything and cut it by 20%, regardless of whether it’s productive or efficient. Don’t do that. Think about it. Deeply.”

That means the plan for your company will be different than your friend’s – it will be different for each market, for each geography, for each industry. But, CEOs and CFOs in any industry can follow the general framework outlined last month by Andreessen Horowitz in their prescriptive post on navigating a downturn. 

Be Preemptive

One of the most important steps in avoiding the problems mentioned above is preparing ahead of time. One thing we discuss on our team is that these economic shifts shouldn’t be thought of as one-time events or unique situations. Rather, they should be viewed as expected milestones that every business will need to pass at some point.

With that mindset, it’s much easier to take the necessary preemptive steps to build spend visibility into your company from the foundations on up. That will put you in a position to be ready for an economic slowdown, but it will also prepare the business to be more effective and nimble when growth picks back up.

Everyone knows the famous expression and the story that inspired it: “this too shall pass.” It’s supposed to serve as a reminder that in our world, nothing is permanent, nothing lasts forever. We all know that the business landscape is dynamic. Change is the only thing that is certain. So, all of the insights we’ve discussed above can really be summed up as preparations for those inevitable changes.

Yes, it’s true that they can be of critical importance during downturns when cost cutting measures and higher efficiency may make the difference in the survival of the business. But similarly, wasteful spending during high growth periods can be just as much of a wasted opportunity. It can make the difference between a stagnating business and one that is reaching new levels of success.

Ultimately, it’s the same mindset and the same techniques and tools that will enable your business to be lean and efficient or a dynamic growth engine. It’s just a matter of when.

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