How recent interest rate hikes will affect the current business climate, and for how long, is a “tough set of tea leaves to read,” says Adam Meister, CFO at Clari. Nonetheless, with the right focus and tools, businesses can survive — and even thrive — in this uncertain market. That was the central message of a recent What I Wish I Knew session with Adam and Airbase CFO, Aneal Vallurupalli.
Adam’s background makes him well qualified to assess and plan for the current economic situation. After starting his career at the Federal Reserve Bank, he went on to financial leadership roles in technology investment banking. Before joining Clari, a revenue operations platform, he served as CFO at Talend, where he helped guide the company through its private acquisition by Thomas Bravo.
What is normal?
A key element to answering the question, “when will the economy return to normal?” is addressing expectations regarding the baseline of “normal.” Adam started his talk by saying that over the past decade, business leaders have been a bit spoiled by not having to focus too much on monetary policy.
“The entire history of SaaS has effectively been intertwined with loose monetary policy. So as I’m watching SaaS valuations and peer multiples, it’s difficult to discern what normal really looks like.”
Aneal agreed, noting that over his career, he’s witnessed a huge leap in the revenue multiples companies trade at, so it’s hard to contextualize the current slowdown in valuations. Both speakers, however, feel that a correction isn’t in immediate view.
Forecasting in the current environment.
The old adage “the only constant is change” definitely applies to today’s economic climate. With so many rapid changes and an uncertain future, accurate planning can feel like flying blind. Adam advises that effective planning acknowledges that uncertainty and builds it into the process.
“We focus on agility over accuracy. All good finance execs will scenario-plan. What really matters is determining what the earliest leading indicators that can signal change, and then that change can trigger different courses of action.”
He outlined the basic process:
- Determine early indicators.
- Have your playbooks predefined on how to respond to those early indicators.
- Think about bounding the range of outcomes in terms of expectations.
The key is to remain realistic. “You’re not going to nail it, so overly focusing on accuracy right now is a bit of a fool’s errand.”
Muscle memory in responding to change.
Aneal feels that the quick pivots companies made at the onset of the COVID-19 pandemic have created a “muscle memory” as business leaders now know to pressure-check their forecasts and respond operationally. “The good news is that the rest of the org now knows how to partner with finance to come to a plan,” he said.
Adam agrees that he prioritizes his team’s ability to be good business partners with the rest of the company in order to spur fast and decisive action. “If you can create that, it’s magic, and the synergy between groups starts to kick into gear.”
Looking at where to make cuts.
When asked his thoughts on making budgetary cuts, Adam said the first move should be looking at the list of vendors by ARR, vendor spend, and renewal rates to find redundancies and opportunities for saving. However, for many SaaS companies, excess spend is more related to headcount than systems. When it comes to headcount, the decision to make staffing cuts isn’t always straightforward.
“You have to think about the tradeoffs and the opportunity costs of not having those resources in place. We think about the potential degradation to growth that comes with that.”
To make those decisions, it’s vital to have a clear understanding of your demand environment and the way businesses move through the sales funnel.
Building in buffers.
It’s also important to be intentional about where the buffers are in any model. Adam feels that companies often aren’t as mindful of the impact of their buffers as they should be.
“If you can operate with a 5% to 10% buffer in your capacity planning, those are meaningful dollars you can put into the business. We spend a lot of time pressure testing our accuracy and how early we can adjust spend so we can keep the buffers as tight as possible.”
Larger buffers are often the result of uncertainty about the forecast, so having the right tools to monitor activities like spending can help with this process. Adam said that recent years have seen an exciting development, where systems like Airbase have visibility and analytics incorporated directly into the systems of action.
Similarly, as a revenue platform, Clari is able to provide granularity in the data generated regarding revenue generation. He named one example: they’ve discovered that if a sale slips from one quarter to the next, it has just a 60% chance of closing in the next quarter. That level of detail fuels FP&A activities.
When it comes to communicating the data, it’s important to have consistency around terms and metrics. “Sales is always a mix of art and science. It’s impossible in an environment that is changing so quickly to incorporate the nuance of one leader’s calls over another, so you need consistency,” Adam explained.
Easy access to the right data is particularly important because, in this environment, timelines should be tightened. Adam pointed to the importance of fast feedback loops, rapid time to value, and timely communication between R&D and GMT teams so products can respond quickly to changes in demand.
Runway vs. funding growth.
As VC capital becomes more difficult to access, finance leaders may have to shift their focus. Adam feels Clari is fortunate to have received a solid funding round before the downturn, so now it’s more about being good stewards of the capital and being prudent with what they have.
For companies who are seeking more funding in the near future, he encourages a conservative approach. “It’s going to be a while before the balance of power shifts back to companies in fundraising.”
That applies not only to spending conservatively, but also keeping expectations around fundraising realistic. “It’s completely natural and good practice to pull in your investment horizons in this period of uncertainty, Maybe sacrifice a bit of return on the investment in order to have things pay off a bit earlier,” he said.
That represents a shift from the “growth at all costs” mindset of the last couple of years. Adam advised that it’s time to go back to basic metrics like LTV:CAC, unit economics, and burn multiples when thinking about the success of your company.
Emerging stronger from a slowdown.
Aneal is a strong believer that many companies have the potential to come out of this current cycle even stronger. When he asked Adam what they could do to ensure success, Adam focused on being nimble in the face of change.
“Have the instrumentation in place, be able to understand the nuances of how you go to market and how your product is used so you can really hone the metrics and focus on what’s most profitable.”