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Resource Center / Becoming a Founder

Successful Cost Cutting & Consolidation During a Recession

We spoke with a few venture capital experts for some tips on where founders can cut costs and how to best consolidate a business during a down market.

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Oct 19, 20228 minutes

A recession can be anxiety-inducing for just about anyone, but especially for business owners. It can be overwhelming to know that you’re responsible for keeping your business alive, which includes making difficult decisions about where to cut costs and how best to consolidate — all so your business can live to see another day.

Most business advice revolves around being pessimistic in the short-term, but optimistic in the long-term. With this approach, you can think about making decisions that protect your business in the short-term, while focusing on a long-term strategy to achieve your goals.

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But where are the first areas to cut costs if you’re a struggling business? And how do you differentiate between cost consolidating and cutting costs entirely? We spoke with a mix of founders and VC investors to get their perspective and advice for founders.

Complete a Financial Audit

While it may not always be the most obvious step, the first thing to do when you’re planning to cut costs is to conduct a thorough audit of your finances. Are there subscriptions you can get rid of? What about software services that you’re not actually using on a daily basis — can you cut down to using those seasonally?

It’s important at this point to remember what your core business is. What is the product or service you provide that’s unique and essential, and what do you really need to make sure it’s still available to your clients? It can be tough to pull the plug on innovation projects that aren’t bringing in revenue, but Rachel Wilson, an investor at Collab Capital, shared a good rule of thumb. “If it’s not bringing in revenue in the next 60 to 90 days, you should have it on the back-burner and focus on your bread-and-butter.” With this perspective, everything else becomes noise or nice-to-haves. Being cutthroat with costs early on can give you more wiggle room down the road, whether the recession ends or not.

Another thing to consider here, which is often overlooked, is your supply chain. Can you cut a deal with suppliers that helps both of you in the long run? Maybe you can lock in a rate so inflationary costs don’t affect you as much, in exchange for six to nine months inventory, as opposed to solely three months of inventory. Perhaps paring back a large inventory and focusing on short-term necessities is the way to go. Either way, think creatively when it comes to your supply chain and don’t assume that the costs in your budget are fixed. A small business has more negotiating power during a downturn than you might think.

Consider the Labor Market

From a talent perspective, now is arguably the best time to be running a business. While it can be tempting to hire a team of full-time talent, the truth is that high-quality gig workers can allow you to run your business with fewer costs and little to no reduction in talent, ethic, or work quality. Especially when preparing for a down market, it’s important to take a step back and evaluate where you need full-time talent versus where you can tap into part-time or freelance workers instead. Contract employees are also cost-effective and useful for getting a website up and running, helping you design social media content for three to six months, or even finance and accounting functions.

While it’s obviously tough to let go of an employee, or consolidate multiple job positions into one role, you can achieve a lot by focusing on part-time or contract talent as you seek to get your business through a recession. Be smart about who your business really needs — a Chief People Officer isn’t really a must-have position for a pre-seed or seed-stage company.

Analyze the Costs of Raising Capital

Though it may seem counterintuitive to cut down on fundraising efforts during a recession, it’s also key to think about whether your financing channels are the right ones for you and your business. To put it bluntly, don’t waste time and resources going after VC funding if it’s not the right fit for your company. While there’s certainly a lot of glamor surrounding investor money, the truth is that it takes a lot of time, energy, and even monetary resources to put together a pitch deck, research the right VCs for your business, build a network of connections, and then give pitch after pitch. If you haven’t thought about raising capital from a VC before, now is not necessarily the time to begin that process.

Read more: How to Strategically Target the Right VCs

To get a better idea of your company’s eligibility, consider trying a tool like Village Capital’s Abaca, which assesses different areas of your businesses and gives you a rating in terms of your venture readiness. While some investors are looking for early-stage founders, the majority are looking for founders who reach a higher score and meet their investment criteria. If that doesn’t sound like you and your business, it might be best to cut down on the costs you’re spending to gain VC funding, and instead focus on alternate forms of capital for your company.

Read more: How VC Funding Changes in a Down Market

If you’re a Black or Brown entrepreneur, one of the realities to consider is that VCs are still not investing widely in BIPOC-owned firms (check out our MWBE Resource Guide for more info on funding options). Mike Steadman, founder of Ironbound Boxing, said that “when we start talking about Black people… we can’t rely on other people’s money to save us. The best venture capital is paying customers.” Rather than searching for VC funding, you might be better off focusing on the core mission and values of your business, getting innovative and scrappy to keep cash flowing, and relying on alternate sources of capital such as crowdfunding or grants and loans. This resource from Collab Capital on accessing supplier diversity certifications could also be a helpful starting point in qualifying for alternate sources of capital.

It’s also okay to be what Steadman calls a “third-shift entrepreneur,” someone who works a full-time job, comes home to a family, and then works as an entrepreneur during their “third shift”. Until your business gets traction, funding your small business through the salary from your full-time job may be a necessary step, and frankly a safer option during a down market.

And another thing — don’t forget that gaining VC capital comes at a cost: ownership. So many entrepreneurs start their own business to give back to their community or have freedom. Those values may not be aligned with those of VC investors who need to see a business quickly scale and make returns. Beth Ferreira, an investor at FirstMark Capital, recommends that founders do their due diligence on investors, just as investors are conducting their own due diligence of an entrepreneur and their company.

“It’s harder to divorce your business partner than it is to divorce your spouse,” Ferreira said. The big takeaway? Don’t rush into VC funding. When you’re looking to cut costs during a recession, make sure the areas where you’re spending time and money are worth it for you and your business.

Invest in a Business Coach

Finally, it’s also important to touch upon the best types of investments you can make during a down market. While it’s never easy to dig up more capital, Steadman advises investing in two aspects of your business:

  1. A virtual assistant

  2. A business coach

A virtual assistant allows you as a founder to spend time making contacts, networking, and bringing in new customers, which will drive your revenue and business while someone else — and ideally a virtual someone — can help schedule your meetings and answer your overflowing inbox. If you don’t already have one, this hire could be a no-brainer.

A business coach, on the other hand, is an investment in yourself and your ongoing education. Yes, there are “free” resources available — from books to podcasts, much of the human experience has already been documented. But a business coach invests in your growth both as a person and as an entrepreneur. Because they’re paid (unlike a mentor or advisor), a business coach has a financial incentive to ensure that you succeed. What’s more, they’re able to quickly recognize where your gaps are and how you can best focus your efforts and attention.

Read more: Recession or Not, Here’s How to Think About the Economy as a New Founder

Although a business coach may not be cheap, they can be an especially valuable resource during a down market when you need to pull out all the stops to stay afloat. The entrepreneurial journey can be lonely, and there are few people to turn to when you’re a founder or CEO. A business coach can help you to carry that burden and see paths forward that may be difficult for you to discern on your own.

Ultimately, it’s never easy to cut costs and consolidate resources, particularly when facing a potential recession. But, getting smart about where your money goes can have positive long-term impacts for the health of your business. What’s more, none of this needs to be overwhelming or difficult! With Justworks, making contractor payments and hiring remote employees can be easier (and more cost-efficient), whether we’re in a recession or not.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.