Tax Trolls Episode 4- 3 CPA Tips On How To Recession Proof Your Business | CPA for Startups

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Transcription:

Tax Trolls Episode 4- 3 CPA Tips On How To Recession-Proof Your Tech Start-up

Lenard: Hello everybody, this is Lenard de Guzman with Argel Sabillo. Welcome to the Tax Troll podcast and in this episode we're going to go over how to recession-proof your business. But first, we're going to do a quick disclaimer this podcast is for entertainment purposes only if you have any issues concerning accounting or taxes please talk to your CPA alright. Let's get into it so Argel I see you're in Wall Street where money Never Sleeps so let's go over things. There's this talk about the recession coming we don't know how many 2020 year 2021 we hear sources from like Bank of America saying it's coming sooner so what do you see coming up and how do you prepare clients for it?

Argel: Well we do hear a lot of talks about recession and especially for start-ups that's something that everybody needs to be paying attention to. In order to make your company recession-proof, I have three tips that I think would be very valuable now people can take action now. One of those tips is immediately look to file a line of credit with your bank so usually when your bank has your account has existed for close to two years, the bank will allow you to you know open a credit card or get a loan or a line of credit on behalf of the business. So that would be one thing that I would highly recommend. If you can't get it for your business and get it for your personal. 

In a recession, it's going to be a lot harder to borrow from banks and even if you already have your loan or line of credit that could be reassessed and cut, cut in half even. So you want to make sure that you have something, you have a backup so that if the worst-case happens then you have a fund that you can tap into to be able to have disposable or have access to cash to run your business. So that would be one.

Lenard: Otherwise, you're screwed you don't have any money in the bank, you have no line of credit you're just going to just bleed out and go out of business. Alright, what's number two, what do you got for me?

Argel:  The second one I recommend is revisiting your revenue model so you know especially for premium products. You want to make sure that you have tier pricing that is accessible and affordable for many people, especially recent college grads that may be having their first jobs and they have all these student loans. They may have a job after they graduate but they're going to be careful about how they spend their disposable income. So you want to make sure that you revisit your revenue model make sure you have maybe like a three-tier or a premium tier but also making sure that whatever revenue you're collecting that you're saving it and having like a nest egg. So that if you don't have access to a line of credit that you make sure that you have money to extend your runway. 

Lenard: Okay, well that's the thing, so you're saying be more conservative especially when let's say consumers like will have less money to spend. And even if they do have it they won't be willing to pay premium for things. I remember, let's say 2008 even going in 2010 it was really difficult to get money from clients to like upsell. They were just like I'm just keeping it conservative I just want to spend this much. Because who knows, maybe they felt they would go out of business. Everyone felt like the world was ending or something. Okay so.

Argel:  The other thing I want to add to that, that I just thought of is there's a company called Nord VPN I think they're doing a good job with their revenue model because you know they always have a deal going on where you can extend your subscription to like two to three years. So they collect all that money upfront. That is a good model because you know if you have a service or a product that people are going to need even in a recession and if they have paid for that upfront now while they still have disposable income then later they'll just be on autopilot and they don't have to like renew so in a way you're kind of like helping your customers too.

Lenard: Yes, so in other words get your money while they still have it.

Argel: Yes, pretty much

Lenard:  Okay, so you said you had three things. What's the third thing you were going to tell us about?

Argel: Okay so usually as a start-up you want to have 6 to 12 months runway. When you're burning through cash and you have investment money you want to know how much runway you have left. In an environment like today you know you can afford to have a 6 to 12 months runway and then when 6 to 9 months hit's you need to start fundraising again. Well in a recession you need to be able to extend your runway from 12 to 24 months. The goal is to be able to survive the recession.

Lenard: Play along.

Argel: Yes, play along. And the way you would do that is you need to review all your expenses now making sure that where you're spending your money is not getting wasted elsewhere where you could be you know saving it up like putting it in a savings account or CD so that's earning interest that you don't touch. Just a little nest egg on the side that you need to be able to save up. Then in terms of the different expenses that you have, the majority of those expenses are going to be employee costs or contractor costs if you're in e-commerce, inventory cost. 

Those are the things you want to pay attention to because employee cost you want to make sure that you're optimizing on on your hires but if you have too many hires that later you're going to need to like cut their jobs you want to make sure that everybody working for your company is there to earn profits right for the company. The same way it's like you look at your vendors and contractors and make sure that these hires or these partnerships are going to exist in 12 to 24 months. If you're freelancing on Fiverr. Looking for freelancers on Fiverr. 

Lenard: Upwork, there you go.

Argel: Or up work you want to make sure. And then in terms inventory, you don't want to buy too much inventory today because you don't want to be stuck with a lot of inventory later. You want to make sure that you're being smart about the type of inventory that you're buying and that you want to make sure that those are going to sell because you know investors ask what's your inventory turnover. Like how much inventory do you have and how fast can you turn those over and if you have a lot of inventory that's not selling that's not going to look good for investors.

Lenard: Okay so like you're saying with the inventory right it's stuck in the warehouse or whatever so then marketing becomes an issue right because it comes down to like the cost of acquisition right. So the cost of acquisition is what does it cost to get that customer. Most of the time you quickly make those sales you're investing SDM, right. So in a recession like because you're basically bidding for clicks like when you see with your clients you see like in a recession does your ad [inaudible 9:10] go up? does like the cost per click go down? Because it has to do with the competitors in the marketplace. What do you see in a recession or have you dealt with that with some clients before?

Argel: Good question, I feel like the recession that we had in 2010 it's very different because at that time the environment was not a lot of people are going online yet right everything is still offline and so we haven't seen anything like this before um once recession hit I predicted you're going to see more companies spending online, right in terms of getting eyeballs like everything from your YouTube TV to Hulu. Marketers are getting smarter about how they get your attention. So more and more I think you'll see companies who are going to thrive in this environment will be platforms that marketers will say big companies go to to have their ads. 

Especially if you look at retail, retail is like one of the largest segments in the US and every year they're struggling to hit their revenue goals and so I think in a recession that's when you'll see more retailers doubling down on selling online as supposed to in-store. Because they too need to meet their margins and selling online is still cheaper than having all your inventory in the store. You also see this trend where buyers are going to stores and they're checking out like the jackets or whatever they need and then they don't buy on the spot they order it online.

Lenard: Right, yes.

Argel:  And then you'll see Amazon will continue to thrive in this environment where you can buy your basic toilet paper and all that stuff delivered to your home. So, yes, I think you'll see the cost of acquisition going up because of all the different. I mean it depends on the industry too- I'd be interested to see what the service industry would do in order to like increase their cost of acquisition because something like a CPA firm, for example, it's recession-proof. More and more you'll see consumers wanting something like today or something like instant gratification.

Lenard: Yes, so on the retail side you're saying basically like a Nordstrom's or Forever 21 file for bankruptcy but I think they're going to revive the company online. So yes that makes sense like all the brick-and-mortar is kind of like going to I guess die out. Then also too that makes sense because the cost of acquisition will go up because the bidding of these companies will go up because it's going to be fierce. But at the same time you got to watch out because if your cost of acquisition is, say $30 and you're selling, I don't know like contacts. I get contacts for my eyes the Dailies I think there's something like almost $40 right, so there if you acquire customers like me for $30 but then you know every month I'm paying you $40 you know so it's a [inaudible 12: 59]. Yes, so I think you're right the trend will continue probably even pass this recession coming so.

Argel: A couple of things I want to add to what you're saying. So you do want to know your key performance indicators when it comes to your marketing spend, you want to know your cost of acquisition and making sure that that is lower than your LTV, your long-term value. There are two drivers right, your LTV and your CAC, those are the two things that you want to optimize and the way you would optimize your cost of acquisition in a recession environment is you want to give out free stuff you want to give up free information you want to do podcasts you want to do blogs or any way that you can like educate the public where they can consume it for free because they're not going to want to pay for it, right. 

And so that dramatically helps your cost of acquisition because then you're not competing Like for example, as a CPA firm we're not going to compete with like Intuit and H&R Block during tax season. They spend millions of dollars ranking, bidding on keywords so you're not going to win doing that. You need to be able to just give away free stuff free information, education, get on forums and blogs and answer questions, those are free. So that's one way. The way that you would increase your long term value is that it's okay to be a loss leader where maybe it cost you $40 to acquire or to buy your service at like 30 right or maybe even like 10 or $5. The idea is that you get them in free or affordable and then you just basically shower them with as much customer service as possible so that.

Lenard: Love, give them the love.

Argel: Yes, you give them the love and then they fall in love with your products and services. And then they become a recurring customer where if you have something that like contacts where you need it ever so often like make it so easy for you to get those contacts. Make it like a subscription or just have it delivered to your door. Text messages it's one of those things now that you can just text the company and go ahead and deliver to me today and then they'll just automatically charge your account. So make it as easy and painless as possible for people to get something recurring. 

You should be tracking data too, on your customers to see how often they're going through their boxes of contact lenses and then making sure that you remind them that it looks like you only had three or four left. So more customization and personalization I think it's a way to grow your long term your LTV. Because then you have a recurring customer for life and also just as a by-product, you're turning your customers into evangelists that would talk about your product to other people. So word of mouth marketing and that also helps your customer acquisition.

Lenard: Okay, it's good. So with the evangelists for tax trolls, we're going to end the podcast there. Hopefully, everyone got some good tips. So tune in for the next episode of Tax Troll we'll see you then, alright Argel see you later. 

Argel: If you guys have any questions feel free to send your message or we'll provide you with the email address if you have any specific questions for us we would be happy to answer it for you.

Lenard:  Alright you got that evangelist who would answer those questions and talk to you later.

Argel: Okay.