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 businesses survive more than a decade, you start to realize that running a successful business takes strategy, focus, and knowledge and not just crossing your fingers and hoping for the best.
To learn more about how business owners make decisions, especially when times get tough, we 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 financial 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 business plan review meetings where we looked at our plan versus actual.
But our reviews were a cumbersome process. We had to export numbers out of our accounting software and our planning software to get the right data; we wanted to analyze not just how we were doing, but how we had planned to do—our forecasts—to understand exactly where we were.
If we had done better than planned, we could dig in and figure out why, so we could recreate the success. If we were doing worse than planned, we could also dig into those variances and figure out how to make changes in very specific and intentional ways.
But the process to get this data was inefficient and required a lot of manipulation in Excel—not to mention double data entry.
There wasn’t really a tool available that automated the process, or that allowed us to be as nimble and strategic as we wanted to be. Beyond looking at what happened, we also wanted to create forecasting scenarios to understand our strategic options. We wanted to be able to understand:
- What happens if the conversion rate goes down? What does that do to our revenue?
- What if we can grow our lead funnel and also grow our average revenue per customer?
- Where can we cut costs?
- How can we maximize profits and minimize expenses to be as healthy as possible, during this economic downturn?
You should always know your numbers, but when times get tough it is inexcusable to try and run a business without understanding and tracking your financials.
We created multiple forecasting scenarios 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. Finding cuts to expenses that saved our staff turned out to be a key reason we survived the recession and thrived as we came out of it.
As we faced this difficult economy, we found that we needed better tools for better business management.
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 saw an opportunity to help other small businesses get beyond survival, and instead, grow and thrive. If we could change the business survivability rate for even a small percentage of businesses, we could really make a difference for entrepreneurs.
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 that you run out of money. You run out of cash. You owe people money. You go bankrupt. You fail.
Even though the reasons for failure can be related to marketing, implementation, supply change, fulfillment, or just an overall economic slowdown, 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 will be very aware of all the levers that drive your business.
What do you see most small business owners doing when tough times hit?
When tough financial times hit, some small businesses 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 combined with time going by. When things 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. 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 financials 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.” Others avoid looking at their numbers because they are afraid of what they might find.
Nothing will kill a business faster than avoiding your own numbers.
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. It directly led to our transition 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 Dashboard feature in LivePlan solve that problem?
Because LivePlan integrates with QuickBooks (and Xero) all our numbers are always visible. Trevor—the Chief Financial Officer at Palo Alto Software—and I are always looking at the LivePlan Dashboard. 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 (download our free cash flow example here as a PDF or an Excel sheet to see a visual representation of cash flow), 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 of the channels 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. If you need a point of reference, 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, which will immediately help your cash flow.
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. There is no magic bullet. It’s about being methodical, understanding your financial drivers and tracking all of your key performance indicators.
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 hiring someone new because you know you can afford it. It makes the decision-making process easier and less stressful.
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 learn the financial side of your business. If you’re not a numbers person, you have to learn to love them. That’s how you get through tough times and continue to grow your business.
Editor’s note: This article originally published in 2016. It was updated in 2020.
