2008 was a very bad year for many industries. The financial media space, which MarketBeat operates in, was perhaps the worst hit. Investors took money out of the stock market in droves as the S&P 500 lost 50% of its value during the 18-month bear market that lasted between October 2007 and March 2009, meaning they no longer had a need for financial newsletters or research software. In a one-two punch, previously dependable advertisers (banks, brokerages, other newsletters etc.) significantly cut back on their advertising spend with brands like the Wall Street Journal, Barron’s and Yahoo Finance. Some print-based financial publications simply didn’t survive the recession due to their large-fixed costs and declining revenue.
MarketBeat, originally called American Consumer News, incorporated at the height of the recession and has benefited from the ten-year bull market that followed. We all know that bull markets don’t last forever, and the next recession is a matter of when and not if. While trying to time a recession is largely a fool’s game, many business owners I interact with think a recession is on the horizon and have begun preparing their companies and financial portfolios in the event a recession does come. While I don’t know when the next recession will happen, I have begun thinking about how to prepare MarketBeat given our industry’s unique sensitivity to economic downturns and stock market declines.
- Reduce Your Fixed Costs
MarketBeat has operated at a profit margin of 75% over the lifetime of the business, but that number has started to slip in the last year due to increased payroll, speculative growth projects and growing infrastructure costs. I went line by line through our corporate ledger and looked at every expense MarketBeat has paid over the last three months and asked, “Do we really need that?” I also looked at the ROI of every advertising placement the company pays for on a monthly basis and eliminated the bottom 20% of placements that weren’t paying off or were just breaking even. I was able to reduce expenses by about $19,000 per month or 9% of our company’s operating expenses.
Some of the specific expenses I was able to eliminate include:
- Reduce Placements with Advertising Network #1 – $2,866 per month
- Reduce Placements with Advertising Network #2 – $6,057 per month
- Discontinue Placement with Advertising Network #3 – $5,150 per month
- Startup Sioux Falls Expenses are Now Being Paid by Zeal – $2,000 per month.
- Discontinued Patreon subscriptions – $31.00 per month.
- Moved Websites from Clouflare Pro Plans to Free Plans – $720 per month
- Discontinued Subscription to Ahrefs – $105 per month.
- Discontinued Subscription to a Financial Data Provider – $500 per month.
- Discontinued Subscription to another Financial Data Provider -$1,000 per month.
- Stopped Promoting my Books on Amazon Marketing Services – $250 per month.
- Migrated 100% of MarketBeat’s Email from MailGun to SendGrid – $110 per month.
- Reduced Twilio Expenses by Shortening Text Messages – $200 per month
Neither our customers nor our employees will likely even notice we are no longer paying these expenses, but these eliminating these expenses will increase our company’s financial resilience if there is a sudden decline in revenue. I think the fact that even MarketBeat has some fat to trim at a current profit margin of 65% shows there’s probably some fat to cut in just about every business. The key to surviving a recession is to simply outlast it by not running out of cash before things get better. If you can cut your expenses ahead of a decline in revenue, you have more profit that can be stockpiled into an operating reserve.
- Grow Your Company’s Operating Reserve
Our company historically has not kept a large operating reserve inside the business because of the consistency of its revenue and high profit margin. We currently keep about 2 months of expenses in our primary checking account and I take home any amount above that as owner profit at the end of each quarter. By the end of 2020, I hope to grow this to having a 6-month operating reserve in our business bank account. I plan to do this simply by taking out less profit at the end of each quarter and increasing our operating reserve by one month’s operating expenses every quarter. When I take out Q4 2019 profit, I’ll leave in 3 months of operating expenses. At the end of Q1 2020, I’ll leave in 4 months of operating expenses, etc.
Again, the key to surviving a recession or a slump in company revenue is to simply not run out of cash. Apple famously has $245 billion in cash on hand that hasn’t been distributed as profit to its shareholders as dividends. Apple had to take a $150 million investment from Microsoft to survive in 1997. Some speculate that Apple keeps as much cash on hand as possible so that it can survive any kind of downturn and have a chance to reinvent itself should the company find itself in the same position that it was in the mid 90’s.
- Develop an Expense Reduction Plan
In addition to the expenses that I listed above, I’ve come up with a list of about $10,000 more per month in advertising and other costs that MarketBeat could reduce should that become necessary. These are advertising campaigns that are marginally profitable and other recurring expenses that the company could do without if we needed to. I also set a 3-month average revenue number that we would need to drop to for that expense reduction plan to go into effect.
One thing that isn’t on the expense reduction plan and never will be is people. I’m committed to my team of 7 for the long-term. I would rather cut expenses to the bone or stop paying myself for a while before laying anyone off. I can always turn expenses on after a recession ends but replacing people that were laid off is much more difficult. If I find myself having to lay off an employee, I’ve seriously screwed something up.
- Reduce Reliance on Your Line of Credit
MarketBeat operates completely debt free, but many companies that sell physical goods finance their inventory with a line of credit from a bank. Depending on the terms of financing, a bank may be able to call a business’s loan and demand full repayment within 30 days. While this is rare, it can happen if a business’s financials start to falter or the bank has setbacks of its own. You can mitigate against this risk by either reducing the need to rely on your company’s line of credit or by having alternative financing ready to go if your bank decides to stop doing business with you.
If you do happen to have a business that relies on physical inventory and bank financing, it’s probably a good time to review your inventory management practices as well. If you are sitting on a bunch of slow-moving inventory, it will be much more difficult to sell through or liquidate during a recession. By keeping inventory on the light side, you’ll have more cash on hand and more flexibility about which SKU’s to stock during a downturn.
- Diversify Your Customer Base
MarketBeat works with over 100 financial advertisers and has 6,000 customers that pay for premium subscriptions. We think this gives our business pretty good revenue diversity because if any one of our advertisers or customers stop working with us, we probably won’t even notice. If you have a less diverse customer base than we do, review your largest five customers and look at what percentage of your revenue they make up. If a single customer makes up more than 10% of your business or if the top five customers make up more than 25% of your revenue, you should try to diversify by ramping up your marketing budget or expanding into other industries.
- Stay on Top of Your Invoices
MarketBeat’s premium subscribers prepay for their subscriptions, so there’s no invoicing risk with that revenue stream. Our advertisers generally get 30-day net terms, meaning they must pay us within 30 days of their advertising campaign being delivered to our audience. If an advertiser has a payable that’s much past 30 days, we’ll tell them that they need to catch up on their invoices before we run another campaign for them. This prevents us from extending too much credit to anyone advertiser.
MarketBeat also tries to pay its vendors on net 30 terms where possible. Ideally the terms that you get from your vendors should be the same or better than the terms that you offer to your customers. If your customers are paying you on net 90 terms and your vendors are only offering you net 30 terms, that will create a cash crunch because your vendors will be wanting payment before you receive income from your customers.
It’s also a good time to think about which customers you want to extend terms to, try to collect on any old, unpaid invoices and make sure that you’ve sent out invoices for all your current work as well. We find that many of our unpaid invoices are the result of our advertisers simply forgetting to pay us and a reminder email is usually all it takes to get a dated invoice paid.
- Think about what business models will thrive during a recession.
Finally, don’t just think of a recession as a storm that your business needs to weather. Some industries do well during recessions. For example, 2009 was a pretty good time to run a discount retail business, an auto-repair business or a home maintenance store. Consumers never stop spending entirely, they just reduce their spending and shift it to more affordable choices. Instead of buying a new car, consumers are more likely to hold onto the car they have and maintain it. Instead of buying a new house, they’ll fix up the house they already have. Instead of buying at Target, they’ll shop at Wal-Mart.
Some very niche industries even grew dramatically during the last recession. There were a lot of HUD foreclosures that needed to be cleaned up and someone was paid to get those houses ready for sale. A lot of cars were repossessed during the recession and someone was paid to repossess those vehicles. A lot more people tried to get on social security disability (SSDI), which means it was a good time to be an attorney that works on SSDI cases.
I don’t know how the next recession will impact your specific industry but try to think about what opportunities a recession could create for your business. Would it be an opportunity to acquire a competitor or vertically integrate with a vendor or a customer? Are there new markets that will open-up or expand as a result of the recession? Can you use a recession as an opportunity to get your business in the best financial shape it’s ever been? Preparing for a recession is not just about battening down the hatches. It’s also about seizing the opportunities that a recession will create for your business.
Getting ready for the next recession will be more of an art than a science. We have no idea when the next recession will occur, how long it will last, how severe it will be, which industries will be particularly impacted and what the catalyst is that causes the recession in the first place. We do know, historically speaking, that a recession will be coming at some point. By reducing fixed costs, building an operating reserve, creating an expense reduction plan, reducing reliance on credit, broadening your customer base, staying on top of your invoices and identifying opportunities a recession will create for your business, you will both be getting ahead of the next recession and putting your business in a great financial position.