How to Cut to Breakeven

5 practical steps for founders & CEOs

By Krista Morgan, Stage GP

a bowl of melon rind that has been cut away

As founders, we all want to grow to breakeven by achieving scale, but sometimes that’s not possible. If you’re running out of cash and you need to buy your company more time, sometimes your only option is to cut your way to breakeven. 

This is a practical guide on how to make the necessary cuts. If you’re still considering whether you need to do this, I encourage you to read my post on extending your runway

Quickly cutting to breakeven is about preserving cash and giving yourself optionality to try and raise more cash, rethink your go to market strategy, gain time to complete a soft landing, or even pivot your business. It requires immediate moves that will feel drastic in the moment, but will provide relief once they’re done.

Building your breakeven plan

A successful breakeven plan

  1. Preserves current (profitable) revenue at all costs
  2. Optimizes for renewals / in-account growth
  3. Minimizes cash outlays

 

That’s it. You’re not focusing on new accounts, top of funnel activity, marketing, or even technical improvement beyond the basics that your current customers NEED, not want. 

This is about saving your business and living to fight another day.

Understand your cash flow to take action

Make a list of:

  • Current customers, their monthly spend, and their renewal dates.
    • Since many businesses take payment up front, make a second list of how much cash they are actually going to send you by month for the next year.
  • Employees, their monthly cost (fully loaded), and ranked by how critical they are to current revenue.
    • People are your single biggest cost. What you want is to figure out the minimal team you need to survive. 
  • Every other cost (hosting, rent, slack, outsourced CFO, etc) and the monthly spend.

 

This will allow you to see the full picture of your cash flow and understand what you need to cut. 

It’s important to note there is a difference between profitable, and cash flow positive. This plan doesn’t necessarily have to make you profitable overnight, but you do need to figure out if you can stretch your cash. 

Let’s say the above gets you a spreadsheet that looks something like this: 

This suggests you are not profitable. But many tech companies have deferred revenue, up-front cash payments, and prepaid expenses. 

So what you really need to get to is a spreadsheet that looks like this:

Note – this breakeven plan is not going to be perfect. Things are going to come up that you didn’t plan, so you want to give yourself more room to maneuver. However, these data will help guide the drastic measures you need to take.

The 5 Steps to Breakeven

Step 1: Stop paying your bills

If you’ve been running a venture-backed company, chances are you pay bills when they come in. Chances are, you don’t know all of the things you’re actually paying for and you are 100% paying for things you don’t NEED

If you’re serious about breakeven, the first thing to do is shut off all cash outlays and see what breaks. Call your credit card company and have them reissue a new one so you only renew recurring payments that you NEED. As you go through the following steps, I encourage you to constantly evaluate costs under the lens of “Is this critical to preserving the revenue I have today?” 

If someone else has been managing your finances and making payments for you, tell them to stop. Make sure everyone understands that you, the CEO, are going to approve every single dollar of spend. This is the only way to truly get a handle on what you’re spending and make cuts quickly.

Step 2: Execute a layoff

This is the worst step. I’ve been there. But it’s also the hardest and most critical step to this whole plan. You cannot cut to breakeven without losing people you care about. You have to tell yourself this is about saving the business so you don’t have to lose everyone. 

Our theory at Stage is “Cut Once and Cut Deep” vs “Death by a Thousand Cuts”. Your business and your team are more resilient than you think, and you can do more with way fewer people than you think.

As you’re choosing the people to layoff, make sure you cut deep enough to leave room to incentivize the people who are staying. You’re likely going to need retention bonuses or raises to keep the people most critical to your organization.

A good layoff is well organized, fast, and direct. Have all the paperwork ready, have payroll lined up, make sure they know how much they’re getting and when.

This isn’t the time to get emotional and thank each person for all that they’ve done and remember the good times. This is a terrible day for them, and the best thing you can do as a CEO is to be direct and give them space to process. 

Once the layoff is done, get a team meeting with everyone who is still on staff, tell them what’s going on, and then have individual meetings with each person.

Step 3: Handle your customer base

Just as you have cut back your staff, evaluate your customers. If you have unprofitable customers – customers that require a ton of work and don’t materially contribute to your bottom line, you need to let them go

For the rest of your customer base, prioritize their needs. You’re now focused on retention so you want to go above and beyond where you can and try and expand revenue or get referrals for new business.

As CEO, you will benefit from spending a lot of time with existing and potential new customers. This will help you focus on the basics of what is needed to grow your business organically and set you on a path for success.

Step 4: Restructure your A/P

This step is all about negotiating. Yes, you’ve signed contracts and/or leases. Yes, you’ve made commitments to pay for work performed. But if you can’t pay, you can’t pay. You need to have difficult conversations with vendors and explain what is possible. 

Remember if you go bankrupt they get nothing anyway. They have nothing to lose by giving you time to figure out a way to eventually pay them back. It’s unlikely anyone will actually try to come after you, especially if you assure them you’ll try to make it right in time. 

Categorize and prioritize your A/P to conserve cash:

  1. Lender
  2. Landlord
  3. Critical vendors 
  4. Other

If you’ve been running out of cash, hopefully you’ve been communicating with your lender frequently. The more you communicate with them the better, especially if you ever need to figure out what to do when you cannot repay your venture debt.

Ask them to give you a break on interest payments if you need, talk to them about milestones you will hit to get back on track. This plan will be something they will support. 

If you’re in a lease, see if you can get out. Talk to your landlord and explain that you need to move or can’t pay. It happens and people work it out directly and with intention. Figure out a deal you can afford and tell them they need to work with you. 

Your critical vendors will likely need to get paid, but see what you can do about extending payment terms. Focus on conserving cash in negotiations and be firm. If you know you’ve got a short month coming up, see if they’ll give you a break. Like with your lender, the more you communicate the more likely they are to help you.

These are not one-time conversations. As you move to running a business that is focused on conserving cash, you will want good relationships with vendors to help give you a break when you need it over the following months.

Anyone not a lender, landlord, or critical vendor is not getting paid. This “Other” list are getting difficult calls from you. If a marketing agency is upset you’re canceling early, just be honest and let them be upset. Make right what you can, but remember this is all business. You’re not the first or last customer who couldn’t pay. It just happens.

Step 5: Rally your team & get back to work

Implementing a breakeven plan before your company is ready is hard and emotionally draining for you and your team. Do something fun, get everyone together for a strategy session to figure out how to move forward, keep the lines of communication open. 

Your team will be looking to you, as CEO, for their cue on whether or not everything will be ok. Even more importantly, they will be watching to see what you do

You’re going to be asking each of them to step up and take on more, and they need to see you doing the same. You’re going back to being more involved in the day-to-day and, honestly, it can be really fun.

You’re temporarily going back into startup mode and it creates a special kind of emerge that can only be created from a painful experience. That experience brings you all together. 

Getting to breakeven quickly is not fun, but the result is a leaner, more focused version of the business you were running before. When I went through this as CEO the hardest thing was letting go of my ego and putting the business first. It does force you to get back to basics.

Amazing things can happen when you remove the pressure of a disappearing runway and put your destiny back in the hands of you and your team.

In order to utilize your cash to the best extent possible and effectively breakeven:

  • Step 1: Stop paying your bills
    • Shut off ALL cash outlays
    • Only pay for your needs
    • Approval all spending from there on out
  • Step 2: Execute a layoff
    • Prioritize critical staff
    • Create incentive/bonus for retention of key team members
    • Be organized, fast and direct
  • Step 3: Handle your customer base
    • Let go of unprofitable customers
    • Deliver the basics efficiently
    • Focus on customer retention
  • Step 4: Restructure your A/P
    • It’s all about conserving cash
    • Likely not just one-time conversations negotiating contracts and bills
    • Categorize your A/P: Lender, Landlord, Critical Vendors, Other, etc.
  • Step 5: Rally your team and get back to work
    • Communicate the plan and take action
    • Get your team motivated, engaged and execute together
    • Keep open communication channels to maintain good leadership and involvement

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