“Can’t shrink your way to success”
He said the words with the same certainty you might say “cash is king” and I didn’t have a good reply because I was so busy wondering why he didn’t see the data the same way I did and was thus taken aback by the confidence in his tone.
The company was clearing running out of cash. Profitability was rare, OpEx was bloated and the expanding product catalog was hoovering up cash.
I get the reasoning behind the saying.
1️⃣ Growth mindsets encourage risk taking and looking for opportunities whereas cutting mindsets are defensive and closed off to opportunities.
2️⃣ You have to invest to grow. You have to invest in customer acquisition, product development, better people whereas focusing on cost cutting can shuts off these growth levers.
3️⃣ By focusing on short term profits you underweight longer term investments that need more time to pay off. You don’t want to be penny wise and pound foolish.
“Can’t be successful without cash” Is what I wish I had said. “Look, either someone magically produces a boatload of cash or we self rescue. So assuming you don’t have a cash rabbit in your hat, that means we have to generate our own cash, quickly. And one of the fastest ways we can do that is to turn more of our sales into cash by dramatically shrinking our expenses.”
Basically, we have to shrink to get to profitability and better cash generation and we can then think about growing again. In other words, we have to survive before we can grow.
If you aren’t facing an existential cash crisis, then the framing should be: “No one is talking about shrinking our way to success. Growth takes investment and investment takes cash. Before we borrow more cash or dilute ourselves by raising more equity, we should do everything we can to turn our sales into as much free cash flow as possible. The lower our OpEx, the more efficiently we do that. And the beauty is that improvement compounds over time. So every cycle, we generate more of our own free cash flow which we can then use to invest in growth.”
A final thought here is that people will go to great lengths to avoid cutting expenses and people. And you are often having the cutting/cash discussion with the same people who oversaw the bloat in headcount and expenses. So it’s important to balance the rationality of increasing cash flow with the emotion of not placing blame for the situation.