Software Companies and Slowing Macro
Software companies often face a double whammy from slowing conditions; pricing pressure and increased churn. This article shows how to mitigate that.
Issue #20
Most software companies (with the exception of Gen AI in some cases) are being impacted by a double whammy of slowing macro conditions and increased scrutiny over software expenditure budgets.
I’ve listed some effective strategies to help offset these issues:
Proactive treasury management: make sure you lock in as high an interest rate possible on excess cash on the balance sheet. Short term rates are coming down so it makes sense to give up some liquidity and take some illiquidity premium to get an effective higher rate. On excess cash, make a risk assessment about the tenor of the fixed income instrument that you want - excess treasury cash does need to be relatively liquid in case there is a need to utilise it for corporate purposes - and the quality of the underlying securities - generally need to be high quality fixed income instruments. The yield pickup can be quite material in $ terms. Negotiate your relationships with commercial banks to see what you can get.
As sales cycles tend to lengthen, pivoting your product or solution offering more towards a consumption based offering can shorten it. However, be aware that this may impact your revenue as revenue recognition for consumption based services needs to be recognized at the point of delivery of the service. If you sell credits for future consumption, this can maintain your operating cashflow, even if it creates a liability in the form of deferred revenue.
Generally get tighter on recognising which elements of your sales motion really matter and which sales people / customer segments have the highest returns associated with them. Double down on those points.
Tighten up your invoicing and be more proactive in chasing down delayed payments. Invoicing should be as automated as possible and with a granular breakdown of the products and services rendered. This is critical as you look to understand key potential drivers of pricing increases or upsell, as well as any potential areas of gross margin optimisation.
If you want to raise short term cashflow, don’t forget invoice factoring (or working capital financing). This can be a fairly expensive form of financing (although contingent on the amount, quality of customers, your own creditworthiness and business model).
Take the opportunity to implement a rigorous ROI framework for larger capex decisions. This is the time to determine and ratify what type of return outcomes your investment plan is supposed to be driving, and put the infrastructure and processes in place to measure that appropriately. If business is slow, use that as an opportunity to strengthen your core “building blocks” and “management muscle”. Be ready to cut those that are underperforming, otherwise suffer from sunk cost fallacy.
See if there’s the potential to position yourself as a future consolidator of tech spend. This can also apply to smaller organizations if they have a product offering that is sufficiently niche such that their particular value proposition and quality is recognized. Organizations can also proactively look to do M&A in this regard.