What to Do If Your Startup is Running Out of Cash

Written by Dave Bailey

Filed under founders management psychology

CEO looking through financial model

Startups that aren’t sitting on significant cash reserves are currently in a fight for survival.

Over the course of just a couple of weeks, economic activity has slowed dramatically. Companies are freezing new purchases in nonessential areas. Consumer spending is slowing down. And investors are fearful as they watch their portfolios tank.

As business owners, these financial challenges mean we have some hard decisions to face, especially when it comes to retaining our staff and managing our dwindling cash reserves.

A lot of people are asking me what other CEOs are doing. While it’s reassuring to know how others are reacting, I encourage you to make decisions based on your specific situation. To that end, here are some of the essential questions to ask yourself in order to successfully lead your company through the coronavirus crisis and to regain control of your cash flow.

1. How much financial risk can you take?

When you spend more than you earn, your business can only exist for so long. The length of time you can survive while making a loss every month is your runway.

Estimating your runway is tricky since there are many unknowns. You’ll need to run some financial models that forecast what might happen in a worst-case scenario. For example, you should map out what would happen to your runway if:

  1. Revenues stay low for a period of three, six, or 12 months.
  2. You can’t raise more funding for six, 12, or 18 months.
  3. You reduce costs by 25%, 50%, or 75%.

For companies in the U.K., here’s a useful checklist that outlines ways to improve your cash flow and extend your runway, including the latest government measures available to small businesses.

A month ago, if you’d come to me with a six-month runway, I would’ve told you to start cutting your costs so you could survive longer. Now, I believe you should proactively reduce your costs if you have less than 12 months of runway.

Even truly outstanding companies will find it harder to raise funding in the next few months because virtually all companies, including their existing investments, are depleting their cash balances at the same time. The hard part is working out how much to cut, and then cutting it. The longer you wait to make this decision, the more you’ll have to cut just to stay solvent.

Reducing your costs is the financial equivalent of “flattening the curve.” Investors can’t fund all good companies at once.

2. How do you fire people in a crisis?

There are many ways for any company to cut costs, and you should investigate all of them. However, for most startups, people are the biggest cost.

There are some temporary options to consider first.

Many founders and employees may be open to taking a salary cut if it means the company can stay afloat and they can avoid unemployment. Another option is a furlough — unpaid leave — where staff stop working temporarily until they’re able to restart.

However, there’s a harder, scarier, and more permanent option that I know many of you will have to look at: laying off part of your team.

To put it bluntly: If your runway is short and if you don’t reduce your head count, you’re likely to face bankruptcy.

It’s going to feel like an impossible decision, and I truly feel for you. Laying off people you know and care about when they haven’t done anything wrong, during the biggest economic crisis of our time, can seem incredibly cold and insensitive.

However, if you’re facing a choice between layoffs and bankruptcy, you don’t really have a choice at all.

Psychologist Paul Bloom defines empathy as “feeling what other people are feeling” and warns us that empathy alone is a terrible decision-maker. He points out that empathy is innumerate (it’s easier to empathize with one person than an entire company), biased (we empathize more with people that look like us), and it can be weaponized (leaving you open to manipulation).

Moreover, Bloom warns that literally feeling other people’s emotions, especially during a crisis, can leave you exhausted and burned out.

Instead, Bloom recommends substituting empathy with compassion. When you act with compassion, you still care deeply about people, respect them, and sympathize with their situation. However, you don’t feel what they feel — for your own sake.

Ideally, if you reach the stage where you need to do layoffs, you should video call each employee individually to deliver the bad news. Explain the situation and the actions you’ve taken to secure the business. Be grateful, vulnerable, and proactive about the support you can offer. Pay them what they’re owed, maybe even with a generous severance if you can afford it.

3. How can you motivate the people that stay?

It’s a huge struggle to stay motivated during a crisis, especially when your co-workers are leaving. And this goes for founders, too.

A crisis is the true test of your company’s mission.

In nonbusiness use, the word “mission” is reserved for the most important and inspiring jobs. It would be weird to say, “I’m on a mission to do the washing up,” unless the magnitude of the cleaning was so large that you’d earn someone’s respect just for trying.

And that’s a good way to think about your company’s mission: It’s the most important thing you’re trying to achieve. After all, if your ultimate goal isn’t important, what’s the point in working hard?

If you’re looking to reformulate your mission to reinspire your team, start with this simple format: “We’re on a mission to help __[customers] __[achieve an important goal/outcome].”

You can’t have a business without customers, so this will clarify whom you’re serving and why you’re serving them. If your mission isn’t motivating, maybe it’s time to find a mission that is and work on that.

4. How can you support your team?

This isn’t just a global health and economic crisis. Each and every one of us is living our own mini-crises right now. And your team is no exception.

They have their own medical concerns, parents and grandparents to worry about, children to look after. They have food to buy, homes to run, and new, enforced routines to manage.

And you can count on one thing: You don’t know the half of it. As a leader, you’re often the last to know if your team isn’t happy. Don’t assume that they are “doing great” if you aren’t aware of anything in particular.

Try setting up a support group a couple of times a week. It may sound intimidating, but here’s a simple format that works:

  • Organize into groups of five to seven people.
  • Each person takes it in turn to share something that’s gone well, or something they’re grateful for. Start with the positives.
  • People are then invited to share a challenge that’s been difficult.

You may be surprised by how many different ways this crisis affects people — especially if you don’t know what it’s like to have kids at home. Listen to your team, acknowledge their challenges, and support them wherever you can — even if that means providing extra flexibility. It might make all the difference.

5. How much communication is enough?

With new measures and policies coming in on a daily basis, your team needs to know where they stand. However, if you’ve just started working from home, your communication levels are probably going down, not up.

Even if you finished planning your quarterly goals just a few weeks ago, it might not be clear whether priorities have changed. Indeed, it’s hard to imagine they haven’t changed, and in most cases, you’ll need to replan. And this needs to be communicated to your team explicitly.

The correct meeting structure is critical at a time like this. You should adopt meetings that minimize communication problems, such as:

  • Regular status updates
  • All-hands meetings
  • One-on-ones
  • Retrospectives

You can also create additional meetings and communication channels to support people that are new to remote working. But aside from setting up the right meetings, it also matters what you say.

Take the opportunity to repeat your company’s mission in every meeting, and clarify what’s most important right now. Share any context and information you have, so your team can act and plan accordingly.

It’s wise to work on your own fears and anxieties outside of team meetings. After all, emotions can go viral inside companies too. Before addressing the team, take a moment to ground yourself with some deep breaths.

If you can, find a way to laugh at yourself. Done well, humor can break the tension and increase people’s spirits.

Communication is about listening, not just speaking. Pay attention to your team’s questions, and answer them as honestly as you can. Their questions will give you an insight into what they really care about, and your honesty will earn their trust.

Now is the time for decisive action

There’s still so much we don’t know. No one knows how long this crisis will last. We don’t know how serious the economic, financial, and social consequences will be. And we don’t know how many people will lose their lives. We’re all in a period of great uncertainty, trying to do the right thing.

However, if you’re close to running out of money, now is the time for strong and decisive leadership. Decide which measures you must take to give your business the runway it needs, and act accordingly.

Many founders are driven by the idea of making an impact. But the biggest impact we ever make is on the people nearest us. Be kind to each other, and be kind to yourself.

Originally published Mar 25, 2020, updated Jun 12, 2023

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