Ask an Underwriter: How do I maintain profitability during economic change?Ask an Underwriter: How do I maintain profitability during economic change?

The economic outlook feels a little shaky at the minute. Although my brand is growing, I'm starting to feel the squeeze – customers are becoming more cautious with their spending, and our margins are getting tighter. I'm a bit worried about maintaining profitability.

• Beyond just cutting costs, what are some proactive strategies we can implement to maintain profitability during economic change?
• What are the mistakes brands tend to make that make them more vulnerable to economic change?
• What are the main KPIs that brands should focus on during moments of economic change?
• Which KPIs does Wayflyer assess that indicate a business is protected against economic change?

Answering this week is Gavin Whitaker, Credit Lead at Wayflyer, who reviews financing applications from hundreds of businesses every month.

But before you dive in… Want the latest insider insights like these, delivered straight to your inbox? Sign up for our brand new newsletter**.

While none of us have a crystal ball, we have learned a lot about what makes a business resilient to external, macroeconomic change over the last half a decade that we’ve been in business.

In that time, we’ve deployed $5 billion dollars to 5,000+ businesses around the world, across DTC, wholesale and Amazon. While we’ve seen some inevitably not reach their growth goals, we’ve seen most of our customers thrive.

For example, 54% of Wayflyer customers have reached 20%+ YOY revenue growth post-funding. In contrast, only 7% of of non-customers who have at one point connected their data have reached 20% YOY revenue growth.

Companies that have survived the last few years will have learned how to dodge punches and react to a myriad of unexpected events happening around them.

For operators who have experienced a global pandemic, unprecedented freight costs, volatile interest rates, and arid equity markets, the threat of a trade war probably doesn’t come as a surprise.

1. Avoid experimentation

When times get tough, focus on your bestsellers, best margin-generators and repeat purchasers. Continue to invest in campaigns you’re currently getting a decent return from, and pull back on those that are underperforming.

An economic downturn is not the right time to invest in a new product vertical or test the waters with a new marketing campaign, unless you have a war chest at your disposal, and not many businesses will have this in unsteadier times.

2. Tighten up your cashflow plan

Cash management is absolutely vital in times of uncertainty. Write a worst-case scenario budget which will get you thinking about alternatives and ways to avoid major issues.

You’ll need to be clear about any major payments due within the next six months, and ensure there are contingency plans around funding these if sales decrease or if other operating expenses increase.

3. Look at low-cost alternatives

You should also have an idea of a few supplier or raw material alternatives that are cheaper than the products currently in use.

While quality may be slightly impacted, this change will at least allow the business to remain competitive when consumers are tightening their own budgets. In general, consumers care much more about price than quality.

4. Learn from the market leaders

In my experience, the most resilient brands do three things in response to broader changes in their market:

• They focus on existing customers: In times of uncertainty, consumers are less likely to spend sporadically to try something new so reaching out to your email databases and social following with exclusive offers will be key here.
• They ensure bestsellers are always in stock: You cannot afford to lose out on a sale due to a lack of inventory for your most popular products, especially if consumers are spending less in general. Try to keep a good supply of your top 1-3 biggest sellers.
• **They remain cost conscious at all times: **Increasing prices to offset costs is not always going to go down well with your customers, no matter how loyal they are. Try to offer high value at all times and use bundling here to your advantage.

1. Growth-at-all-costs mindset

When equity markets were thriving, companies were racing to gain market share. Although this was a good strategy at the time, it's only possible when there is ample access to cash.

In truth, this approach is all about acquiring more and more new customers, investing in digital ads, but not focusing on retention, which is where you want to focus on for long-term, sustainable growth.

However, when things dry up, some companies take too long to shift gear. Therefore, they aren't quick enough to deal with change and struggle to continue operating.

2. Debt stacking

Sometimes when cashflow begins to get strained, some companies take short-term debt from various providers. They assume that they only need this due to a cashflow pinch, rather than anything more serious.

Then unfortunately, the demand for the products doesn’t pick back up quickly enough, which leaves them in more difficulty due to the added payments.

3. High concentration risk

Being highly reliant on one product, one supplier, or one retailer significantly increases your risk of failure. For example, when a major product recall occurs, not all businesses are equipped to handle it.

The lesson here is not to put all your eggs in one basket. Diversify your supply chain, your revenue mix, and your products wherever possible.

1. Customer Acquisition Cost (CAC) and Lifetime Value (LTV)

We generally look at LTV over a 12 month period. This is because it allows us to track two things about your business – marketing efficiency and the stickiness of product, or your overall customer loyalty.

2. Operational gearing levels

Operational gearing is a company's fixed costs as a percentage of total costs. This is important to know and track. The lower the gearing, the lower the risk. If it’s high, a fall in revenue will result in a large impact to the bottom line.

For the majority of companies we fund, operating gearing is low as the bulk of the costs are variable – think cogs, marketing, logistics, and other selling costs. The only major fixed costs will generally be payroll, rent and subscriptions. Control these by keeping your fixed costs below your variables to de-risk your business.

1. Balance sheet health

Balance sheet health and stock runway are always important, but particularly important during times of economic uncertainty when access to finance is more restricted. Valuations are low and debt is more expensive.

So having a strong balance sheet is basically a necessity. If a company is highly leveraged or has relatively low liquidity (current ratio at or below 1.0), it will be more difficult for them to firstly access additional finance, and secondly remain competitive in turbulent times.

2. Customer loyalty

When the LTV of customers is high and increasing over time with large returning customer numbers, a company doesn’t require high marketing spend. This can be pulled back with relatively low impact on revenue. The products are obviously popular and of sufficient quality so little investment is needed in this area either.

Additionally, loyal customers are price-inelastic so marginal increases in price won’t adversely impact revenue. All of these are the reasons why LTV is so important not only in times of economic downturn but at all times.

3. Gross margin

We would decipher whether or not the company has figured out its unit economics. The lower a company’s gross margin, the more it will be impacted by things like tariffs and falling consumer confidence.

Relationships with suppliers, negotiating power, potential for bulk discounts, terms and concentration risk are all important factors that we would also consider in order to get the bigger picture here.