Six ways startups can prepare for financial instability before it happens

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Despite positive indicators of recovery in the Canadian economy, the COVID-19 pandemic has proven that things can get bad quickly. For startup and small business owners, this means preparing for financial instability in the future even as they potentially grapple with it in the present.

Speaking with BetaKit, Xero Canada Country Manager Faye Pang shared her top six tips for what small businesses can do to prepare for financial instability.

1. Set up access to capital

Entrepreneurs go into business to chase a passion, not manage their books. But not staying mindful of practical considerations can turn otherwise mild problems into a crisis. To get – and stay – ready, Pang recommends that small business owners first ensure access to capital.

It’s not about instantly taking a loan, Pang said. Instead, it’s about “setting up the routes to get money, if need be.”

Pang recommends that entrepreneurs look at all the options available to them: traditional loans and other forms of debt financing, equity financing, royalty and revenue share financing, and more. The key, said Pang, is to assess which option will be the most convenient for your business type and offer the lowest total cost of capital (including both principal repayment and interest or fees).

2. Plan for where your business can lean out

It’s fine to spend money on expenses that make life marginally easier, but Pang said it’s critical to know which expenses are luxuries so you can cut them at a moment’s notice. She recommended first reviewing usage based-pricing platforms, as entrepreneurs should be able to reduce these expenses quickly. The second thing is to look for ongoing expenses that are not critical to delivering your business’s core service.

“There’s tension between survival and growth.”

Pang also advised entrepreneurs to not forget the power of negotiations.

“Think about renegotiation to bring down liabilities,” said Pang, adding that creditors are often willing to be flexible in times of crisis to ensure they get paid.

Pang also noted that technology can be powerful in these situations. Running through expenses manually on a spreadsheet could take hours depending on your business. A cash flow management platform can run reports in minutes, giving you a snapshot of expenses that you can identify to cut or keep. Further, you can set up the platform to notify you if an expense increases, providing peace of mind that your costs won’t explode without you knowing.

Xero is committed to Canada. Go here to learn more about customized Xero features built specifically for Canadian small businesses.

3. Identify which expenses shouldn’t be cut

A critical mistake startups and small businesses make in times of crisis is cutting the wrong expenses. Pang noted entrepreneurs have to make sure they aren’t cutting expenses that would allow them to grow tomorrow just for the sake of surviving today.

“There’s tension between survival and growth,” said Pang.

Pang shared the example of an Italian restaurant in Toronto that was initially hit hard when the COVID-19 pandemic shut down indoor dining. While it had to cut multiple expenses to stay afloat, one area where the owner ended up spending more was on ecommerce and kitchen expenses. He turned his restaurant into a prep kitchen, putting his customer-beloved tomato sauce in jars and selling them direct-to-consumer (DTC) online. By keeping expenses that enabled growth, the business was able to survive and find a new revenue stream.

4. Accelerate into the curve

Speaking of finding new revenue streams, Pang recommended looking at the source of your financial instability and seeing if there’s an opportunity there. In addition to the restaurant example noted above, many brick and mortar companies faced significant difficulty, but found an opportunity in switching to ecommerce.

Another way to accelerate into the curve might be rearranging your business roadmap. Pang shared the example of a software company that flipped its roadmap on its head in order to accelerate into the change brought by the COVID-19 pandemic.

The company was planning multiple products and had initially shelved a virtual conferencing product because it was not in demand. Then the whole world suddenly went remote, and customers were clamouring for a virtual conferencing solution. The company stopped all other work, re-prioritized the virtual conference product, and got it live in record time – just quick enough to capture a huge upswing in demand that helped the company weather the pandemic far better than if they had doubled down on their previous roadmap.

5. Prioritize the unexpected

While you can’t know when an ‘unexpected expense’ is coming, you can do some broad preparation. Pang said that some prep is crucial, as unexpected expenses are “a big one we’ve seen side swipe small businesses.”

Pang recommended that entrepreneurs start by thinking about their personal risk tolerance, business goals, the environment they operate in, and the type of business they run. Only then can you develop an idea of what “preparation” means to you.

“Different people have different perspectives of how much cash you need to have on hand,” said Pang.

If business owners aren’t sure how to work through questions of goals and risk tolerance, Pang suggested that a professional advisor would be a worthy expense. Not only can advisors help ask the right questions, they can also offer in-depth advice based on what they’ve seen other clients do, meaning you get a broader perspective.

6. Keep a keen eye on your funnel

The best cure for financial instability is more revenue. In this way, Pang said small businesses and startups are “not dissimilar from a big business” planning for financial instability.

Pang recommended entrepreneurs think about their funnel in three ways:

  1. Existing customers: are there expansion opportunities or additional products and services you can provide to your existing customer base?
  2. New customers: are there new go-to-market avenues you can use to reach new customers, or have circumstances changed in a way that a new customer base now needs your product or service?
  3. Product growth opportunities: is there an opportunity to repackage existing products and services to generate new business?

Instability doesn’t have to mean insolvency

All businesses face the possibility of financial instability; the key is simply to plan ahead.

When starting financial instability planning, Pang recommends entrepreneurs take things slowly. You don’t have to come out of the gate with a two-year plan. Start by ensuring you can meet payroll obligations in two months, then extend the runway to quarters, and potentially, years.

“As with any habit change, start small,” said Pang.

Feature image courtesy Unsplash.

Stefan Palios

Stefan Palios

Stefan is a Nova Scotia-based entrepreneur and writer passionate about the people behind tech. He's interviewed over 200 entrepreneurs on topics like management, scaling, diversity and inclusion, and sharing their personal stories. Follow him on Twitter @stefanpalios.

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