How We Made It Through a Recession, Became a Subscription-Oriented Business, and Stayed Cash Flow Positive

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Every day, business owners across the world are making important decisions: investing in new marketing software, adding new products and services, deciding to hire new employees, focusing on getting new work—and forgetting to collect overdue payments.

The real question is: How do they make these decisions, especially when the outcome could significantly affect the business’s health?

When you consider that only three out of every 10 business survive more than a decade, you start to realize that running a successful business is not a consequence of guessing.

To learn more about how business owners make decisions, especially when times get tough, I sat down with Sabrina Parsons, CEO of Palo Alto Software.

In this interview you’ll learn more about Palo Alto Software’s own struggles; about how LivePlan, our flagship product, came to be; and about how we make decisions that impact the bottom line. You’ll also (hopefully) walk away with a good understanding of what you need to do to make good, informed decisions.

Has Palo Alto Software ever had to get through tough times?

I took over Palo Alto Software in April of 2007, right before the “great recession.” From an economic perspective, it was a very difficult time. As we moved into 2008—when things really started to fall apart in the economy—our conversion rates decreased. People just weren’t buying.

How did you get through these tough times?

We had always been a company that planned—because that’s the focus of our products—and we had always had monthly review meetings where we looked at plan versus actual. But the reviews were a big, cumbersome process because the product that we used—Business Plan Pro—was built to help people write a business plan, not manage a business on an ongoing basis.

There wasn’t really a tool that helped us bring everything together, or that allowed us to be very strategic; to really forecast and see what the numbers looked like, and to play with things. What happens if the conversion rate goes down? What does that do to our revenue? Where can we cut costs? How do we keep from having to lay anybody off?

When times are tough, you’ve got to know your numbers.

We rethought the forecast and looked for opportunities to cut costs so that we could keep people on board. We knew that if we laid off a bunch of people, we’d be left behind when the economy got going again. If we reduced our staff, we knew that we’d have to spend more money and time finding new employees when things got better. We didn’t want to fall behind because we were short-staffed.

We said to ourselves, “If only we had a tool that automatically compared our accounting data to our forecast and that kept everything front and center.” And that’s when the idea for LivePlan was born.

We already knew that we needed to move on from developing Windows software to building something online, and we really started to feel like there wasn’t a tool that could help somebody in this “ongoing business management process.”

“The only way to tackle really tough times is to understand the financial implications of your decisions, because the only reason you go out of business is because you run out of money.”

The only way to tackle really tough times is to understand the financial implications of your decisions because the only reason you go out of business is because you run out of money. You run out of cash. You go bankrupt. You fail. You owe people money.

Even though the reasons can be related to marketing, implementation, or a whole lot of other stuff, the proof is in the numbers.

If you can manage those numbers and understand what lower sales are going to do to your cost structure, or if you understand areas where maybe you can become leaner without affecting your core business, you’re going to be able to get through tough times. You’re going to position yourself to be able to grow in healthier ways because you’re going to be very aware of all the levers that drive your business.

What do you see small business owners doing when tough times hit?

Some of them turn to their accountants, but a lot of the time, things start to fall apart and they can barely keep their head above the water. When they realize they can’t pay their bills, they call their vendors asking if they can be 15 days late, instead of sitting down to ask what is causing the problem.

Most of the time what kills a business is the actual lack of knowledge in combination with time going by. When things to start to happen, you panic. You’re not a “numbers” person and so you just let things snowball out of control. Before you know it, you’re bouncing checks, and you can’t meet payroll, your creditors are knocking on your door, and then you go into bankruptcy.

“Most people just don’t look at their numbers; they start to panic, and things start to fall apart.”

Most people just don’t look at their numbers; they start to panic, and things start to fall apart. Then, they feel like they don’t know what to do. Because they’re not looking at their numbers, they’re not understanding how their business works.

Fixing a cash flow problem can be as simple as a service business getting someone on board to actually call and get all those invoices paid on time, instead of letting them lapse for three months. But, if you’re not going through the process of a full financial forecast, even if you can collect the cash in 15 days instead of 60, you’re still not going to know what the implications are.

Some people avoid looking at their business numbers because it sounds boring, or because they think they’ve got it all in their head, or because they believe they’re not a “numbers person.”

I’m such a big believer in keeping an eye on the numbers, not just because our products help you do this, but because it’s the only way our company got through the recession and then transitioned from Windows-based software—a transactional business model—to hosted, cloud-based software with a subscription business model.

It was not easy to make that transition, and get out of the recession and do all of it without going into debt. It was stressful. It was hard. And it took very careful fiscal management.

How does the Scoreboard feature in LivePlan solve that problem?

Because LivePlan integrates with Quickbooks, all our numbers are always visible. I look at the Scoreboard all the time. Trevor—the Chief Financial Officer at Palo Alto Software—and I are always on there. I’m just such a big believer in it because it’s the way I run this business. I don’t have to wonder whether there’s going to be money in the bank in six months; I can look at my cash flow forecast, and I can look at whether I’ve been hitting that forecast. Am I off? Am I up? Am I down?

If I have to make a business decision—should we do that conference in three months? Should we do that marketing initiative?—I can look at my numbers to see what they say. Maybe we’re doing 20 percent better than we expected and we have extra budget to play with. Or, if things aren’t going the way we wanted, I know I’m not going to spend money there.

Otherwise, you’re just trying to make guesses instead of actually letting the numbers inform you. Most small business owners bumble through a lot of things and just make gut decisions.

What would you advise business owners to do when they start struggling?

I think they really have to understand all the levers that get money into their bank account.

If you are sending out invoices, you’re going to want to understand how long it really takes customers to pay you. You can also look into what the industry standard is. If your customers are paying in 30 days and the industry standard is 60 days, don’t spend time trying to make them pay faster. They’ve already paid faster than typical customers. That’s usually not the case, though. Usually, with accounts receivable, if you’re not managing it really well and if you don’t understand what the benchmark is, businesses are waiting too long to get paid. If that’s the case, you have to put strategies in place to collect your money faster.

Really, it’s all about the cash in the bank.

If you stock inventory, you have to understand it. How much do you have? How much do you need? Do you have too much? Is it going out of style or out of season? Does it go bad? Is there an expiration date? It’s a very careful dance and you need to understand all those levers so that if things don’t go as planned, you can manage them.

Those are the things that I think are really important for the small business owner. What drivers are getting that cash into your bank account and what drivers take the cash out of your bank account?

Any other tips for business owners?

The biggest thing for me goes back to the numbers. I know people don’t always like to hear that—not everybody likes numbers—but if you’re a business owner, you have to respect them.

If you do it right, you will start to get joy out of your numbers. You will get joy when you hit your goals, or exceed them. It will make you feel better when you make decisions about cutting costs, or lay someone off, or hire someone new because you know you can afford it. It makes the decision-making process easier and less stressful.

“If you do it right, you will start to get joy out of your numbers. You will get joy when you hit your goals, or exceed them.”

And, it is stressful to be a business owner. People think of it as the American Dream. They think you own your own business, you have no boss. The truth is, payroll is your boss. The vendors you owe money to are your boss. The landlord you lease your building from is your boss.

It’s not an easy place to be and it’s not as glamorous as it’s sometimes made out to be. You just have to suck it up and be methodical, and you have to know your numbers. If you’re not a numbers person, you have to learn to love them.

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Posted in Growth & Metrics