The markets are pretty scary right now. There are a lot of folks losing sleep over everything that is happening as we officially enter a bear market. Who could blame them when these are the headlines we see in the news?
- US recession risk hits 72% by 2024
- VC firm Sequoia's warning: Cut costs, preserve cash
- Fed officials raised possibility of ‘restrictive’ policy to fight inflation
As a payments and financial services business, we’ve been tracking the macro trends quite closely here at Ramp to prepare for their impact on the company. Recently, I gave an “Econ 101” town hall presentation to the Ramp team to help folks get a deeper understanding of the data and metrics we’re monitoring and the corporate planning we have in place to weather a potential storm. The following is a (slightly redacted) version of the materials I shared, and some of my general advice for finance teams trying to guide their organizations through economic headwinds.
What we’re tracking
At Ramp, we’re monitoring both external and internal indicators to give us a contemporaneous sense of what's happening in the market. We illustrate some of them here:
The key external metrics for us (which I’ve highlighted in green) are:
- GDP growth rate: Despite the alarming headlines, the data shows that we’re not yet in a recession, defined as two or more consecutive quarters of negative GDP growth. In fact, most experts still think that we're going to see 3% GDP growth this year. That said, less fiscal and monetary stimulus will no doubt make growth more challenging in the next few years. This is definitely one of the most important indicators we track.
- Inflation: This metric has been all over the news. The Fed has raised interest rates as a response to our elevated levels of inflation. Higher interest rates, in turn, will make investors more reluctant to invest, and increase their hurdle rates. As a result, the conventional wisdom these days is for businesses to try to extend their runway due to a scarcity of investor capital.
- Consumer spending: This is a particularly relevant indicator for Ramp since payments facilitation and credit card issuance is such a big part of our business. With inflation and recession looming, consumer and corporate spending could be impacted, especially for larger purchases (durable goods tends to be a high signal-to-noise macro indicator). This is a key input for our forecasting model.
- Lending performance: This one is near and dear to the Ramp team as it is a loss vector for our company. Delinquencies and losses are going up across the credit card and lending sectors. It’s important to keep in mind though that these levels are coming off historical all-time lows, so there’s no need to worry just yet. A data source that we like to track is 8-K filings for companies like Visa and Mastercard, as well as Credit Card ABS Master Trust filings, which are publicly available on a monthly basis and provide extremely high frequency and high granularity data on performance trends.
As for our proprietary internal indicators, I can’t go into too much detail here, but suffice it to say, we’re tracking quite a hefty corpus of internal portfolio data, including:
- Payment and delinquency rates across our portfolio
- Cash on hand as well as burn rate
- Performance segmentation by industry, company size, origination channel, and cohort, among others.
Our read of the market is generally based on the above indicators. Different companies obviously operate in different industries, and each company should choose its own indicators, which may reveal that certain industries act as leading or lagging indicators for the macro economy. I would imagine a real estate-focused company would be interested in mortgage spreads and home equity accumulation across different geographies, and may be seeing some volatility in their industry. A company that is in the auto industry may find that monthly SAAR and supply chain indicators are early signals for their business. Picking the right indicators to track is an essential exercise for internal alignment and strategic decision making. In a later section, I’ll outline why it’s so important.
How we’re responding
Every organization will have to develop a response based on their own circumstances and indicators, but here’s what we’re doing at Ramp.
1. Encourage teams to keep making smart, long-term bets.
Because we’re not a publicly-traded company, we have a little more operating flexibility and can afford to keep making multi-quarter or multi-year decisions and investments. Different companies may face different pressures on this front. We are in a lucky position to have a significant amount of operating runway and flexibility, but we understand that not everyone is in that situation. All of that being said, remember that as a finance leader, your role is to build a good business for the long haul, so try to avoid making knee-jerk, rash decisions, despite the headlines. Don’t fall victim to Recency and Availability Bias! Your corporate strategy from 3, 6, or 12 months ago, assuming it was good at the time, is probably still largely intact.
2. Be a good steward of capital for ourselves and our investors.
We’re working proactively to drive down operating costs and improve operating leverage. Operating leverage is the important concept where, as the business grows (let’s say top-line revenue), margins ought to improve (ideally) and expenses ought to be scaling sublinearly so that each incremental dollar invested is put to better and more efficient use. It’s a never-ending challenge.
Functionally, this means sniffing out deadweight SaaS vendors and terminating contracts for things we’re not using. Identify what services we can bring in-house or substitute with more efficient solutions. What solutions are not just efficient today, but are most scalable for the future (again, ideally in a sublinear way)? Thankfully, the Ramp platform makes it simple to track our vendors and identify issues like duplicate SaaS subscriptions and redundant merchants.
3. Increase focus on driving ROI and efficiency.
One metric we’re paying close attention to is our burn multiple: the incremental profit contribution we see for every dollar we spend. In a lot of industries (and public company analysis) this is similar to a concept known as the capital intensity ratio. The goal is to keep that ratio in a more favorable state. We’re doing this by reaching out to all areas of the business and helping them sense-check their assumptions and sanitize their data. In a market downturn, this could very well mean a reduction in hiring, or a decrease in marketing spend, for example. The finance team should absolutely treat this as a top priority, especially at this juncture, as it is likely one of the most high impact things you can do.
4. Actively manage liquidity and our balance sheet.
Asset-liability mismatch has brought down many, many companies. Watch the short and long duration assets and liabilities and make sure they align. We had previously published a short guide to negotiating our own funding facility. One area I cannot stress enough is the importance of obtaining committed lines of credit. Make sure that the partners you work with are there for the long haul and will stay with you through thick and thin. In our conversations with dozens, if not hundreds, of CFOs and finance teams, in recent weeks we’ve heard that while equity fundraising has been tepid, many finance teams are shoring up liquidity by locking in corporate revolvers, asset-based loans, or other forms of non-dilutive working capital financing. Do not ignore the importance of capital allocation and balance sheet optimization. Here at Ramp, we are lucky to have a number of both asset-backed and corporate financing solutions.
5. Ensure cross-functional alignment on decisions.
More than ever, it’s important that the organization is able to stay agile and pivot as needed. To make this happen, teams need to understand the major decisions being made and why they’re valuable. Don’t neglect your cross-team communication, as it can have a large positive impact on team morale. People need to feel bought into important decisions.
This is not limited to just the internal team but includes the board of directors and your investors. If anything, finance teams should be more engaged and involved than ever in communicating with stakeholders so that no one is caught by surprise. You’d be surprised how supportive some of these folks can be in terms of providing guidance and advice.
6. Develop a tactical playbook for managing risks and plan around recessions.
This is where we tie this back to the first section around macroeconomic indicators. Here at Ramp, we’ve developed an extremely granular risk mitigation playbook. Not to be overly reductive, the key here is to set up a series of “IF-THEN” statements ex ante, so that you have some mental preparation for what SHOULD happen WHEN. For example, if a particular indicator reaches a certain point (such as credit card losses), what should we do with the marketing budget if losses increase by 10%? What about new product introductions if pipeline conversions tank 20%? What about talent and hiring plans if the unemployment rate spikes to 10%? As with signal generation, this is going to vary by business, so I would just encourage you to run some stress tests and have some overarching framework for all the actions you could potentially take depending on the stress level in the economy. Nothing is set in stone, and it always pays to remain nimble, but I think this is a valuable thought exercise. Worst case scenario is: nothing happens at all, but you’d at least be able to sleep better at night.
Don’t panic but don’t rest on your laurels
The headlines are unnerving, but I believe for most businesses, there’s no need to panic and swing so hard in the other direction that you cause a bullwhip effect. Building a lasting business takes time, and you want to be a dependable partner to your investors, employees, vendors, and customers.
At the same time, don’t rest on your laurels. Think critically about how your organization is spending time and money and make sure you’re being efficient. Do what you can to extend runway (a rule of thumb we’ve been hearing is to extend to 24 months at a minimum). Please do reach out if you are seeking advice on raising non-dilutive financing. The debt markets are extremely active and we have many partners who are active in the space.
Above all, remember your customers and employees are human. For some of your customers, the situation may indeed be quite dire. In these times, we may not all need a bailout but we could all benefit from an extra dose of empathy and understanding.