You can’t control the world, but you can lead your company through a downturn. How? In this Tough Things First podcast, Ray Zinn explains, in simple terms, how to tighten the budget belt while saving your profits and people.
Rob Artigo: Rob Artigo here, once again, your host for this edition of the Tough Things First Podcast. I’m an entrepreneur in California. It’s wonderful to be back with you, Ray.
Ray Zinn: Well, I’m looking forward to this one very much, Rob.
Rob Artigo: Well, let’s talk about the fiscal belt and tightening it. Current circumstances in the economy and America around the world indicates that a lot of businesses are going to be interested in trying to figure out how to save money. I mean, we’ve already seen layoffs in 2023. And this is about how to cut expenses, how to also conserve cash in a downturn. So, you’re famous for decades of profitability at Micrel Semiconductor, and part of that was ensuring that you had operating capital in the bank to make sure that you could weather those storms for a period of time. So, let’s start with telling the listeners about having a strong foundation.
Ray Zinn: Well, the strongest foundation you can have, of course, is cash, because that’s what keeps the doors open.
Ray Zinn Cont.: And you want at least six months to a year’s worth of working capital whenever you start your year or start your quarter. If you do a rolling six months or a rolling year planning, you want to make sure you have enough cash to last you through a downturn. Downturn typically lasts about a year and a half, year to year and a half, maybe two years. But that’s about the total length of a downturn. And we are entering one as we speak. I don’t see the economy reversing itself until third quarter of 2024. So, we’re getting into it now. This is probably going to be at least a year and a half, two year downturn that we’re looking at, because we’ve already been in one since three or four months ago. We’ve been in this recessionary situation.
So, for those who are listening to this podcast, recognize that things not going to get better until third quarter of 2024. So, having said that, one of the key things about managing your business during a difficult time is to understand discretionary spending versus non-discretionary spending. So, discretionary spending is where you have the money, you have a need and you want to acquire something, but it’s not mandatory. In other words, it’s not something that you have to do, but it’s something you’d like to do. And maybe it’s to grow your business, maybe it’s to expand your operation. And so, that’s called discretionary. Non-discretionary are things like rent, employee salaries, taxes, your power and electricity, your gas and electricity, just things that you have to have, you can’t do without them or you just shut down. So, that’s called non-discretionary, things you have to have that you can’t avoid.
So, those go at the top. See, what you do is you have your list of your spending. You should do that. You should take a look at all your spending. And at the very top, you put down rent, and then of course, maybe taxes. Put on your ones that you have to do or you’re going to be shut down. And then once you listed all those we call non-discretionary. And they total that up and that ends up with a certain number. And you look at that number, and that number should represent if you’re on a difficult recessionary period, that number, it should be more like 80 to 90% of your total spend. In other words, what you’re going to do, then you look at your cash available, available cash, and then that will help define what your runway is. In other words, how long can I survive?
Because then you look at what kind of income you’re going to have coming in, and then that adds to the cash you have and that’ll tell you how long you can stay in business, but just looking at the non-discretionary. So, during a difficult or recessionary period, the discretionary ones are the ones that go at the bottom, very, very bottom of the page. And maybe you have to discount those all together and say, we are not going to do any discretionary spending until the economy turns around. So, that’s the way you go about managing yourself during a recession.
Rob Artigo: That’s conserve cash. I guess, would you also category some of those discretionary spending expenses that you’re cutting? I mean, I think of the government, the government goes, “Well, when we cut spending, all that really is is a reduction in the amount we’re going to increase.” But in business, we can’t really get away with that. So, when we cut spending, we can cut discretionary spending, but is there a time when we have to go further than that?
Ray Zinn: Yeah, well, sure. Well, okay, let’s back up a minute. So, deficit spending is spending money that you don’t have, that’s called deficit spending. So, get that clear. So, if you’re deficit spending, your runway is going to be very, very short, especially if your income is dropping off. And so, if you say, “Okay, now we need to look at going into the non-discretionary,” like at Micrel, what we did is we either offered them vacation time, more vacation time, more time off as you would, more holidays, or I asked them to take a pay cut. So, the first thing we did, of course, we asked them to take more time off. So, if they didn’t have holidays or didn’t have the vacation time built up, then of course, it was just going to eat into their income.
But most employees are willing to cut back either in their vacation or holiday time and not take a pay cut. So, then next step you say, okay, now, that’s not going to be enough, now we going to do pay cuts. So, then you go in and you take a pay cut, whatever pay cut my employees took, I doubled it for myself. So, if I require them, I take a 10%, I took a 20%. And sometimes I took 100% depending upon where the cash was. I’m helping with a couple of companies and helping them manage their finances, and the last thing that they’re willing to do is cut their salaries. Well, but you may have to. And I tell them, if you don’t cut your salary, if you don’t cut back that pay to certain employees, you’re not going to last. You’re going to run out of money.
Now you can go to your landlord, if you’re renting a building and you can talk to them about maybe giving you a little hiatus on paying rent, or maybe you cut back on the rent, tell them make it up when business improves. Or you can go some of your other creditors and ask them to give you a little bit of runway on payables, maybe going from 30 days to 60 days and 90 days or 120 days, you can do that. So, there’s some things you can do, providing you show them that you’ve cut out all this discretionary stuff and that you have taken some of the hard decisions about reducing salaries.
Rob Artigo: Yeah. You’re not going to get that cooperation, whether it’s from your employees or creditors, if you are also engaged in frivolous spending.
Ray Zinn: Right. Yeah.
Rob Artigo: Hearing you talk about the things that you did during downturns for Micrel, I know from talking to employees, former employees of Micrel who said they were thankful that fewer people were let go or had to leave the positions because there was so much across the board cooperation when it came to that. I mean, when we’re talking about taking pay cuts, you’re talking about temporary moves, right?
Ray Zinn: Exactly.
Rob Artigo: You’d get people back to their level when things turned around a bit. So, like I said, the employees, the former employees I talked to seemed like they were really into that. What was the reaction that you received generally when that happened? I’m sure it wasn’t something that came up very often.
Ray Zinn: Well, I mean, they’d much rather have a pay cut or less vacation, or they’re willing to make some sacrifice like that rather than being laid off, because they get their insurance or their medical insurance covered. They also have their social security covered. So, there’re things that they’re paying into while they’re employed that they don’t get paid into if they’re not employed. And so, they’d rather be employed at a lower level than unemployed at no level.
Rob Artigo: Right. And then during a downturn for a company, it’s a downturn in the economy in general. And people get worried about their futures. And they fret about, well, what if I lose my job? Their willingness, I mean, I think for a lot of people who haven’t gone through this before, would be surprised to see how willing people are to temporarily take a little bit of a pay cut in order to keep things going.
Ray Zinn: Absolutely. The first thing you do is cut back of your discretionary, cut that out. Almost go to zero. Non-discretionary, obviously, the biggest thing you have that’s non-discretionary is payroll. And as soon as you can scale that back, you have to be able to project out how long you think a recession is going to last, how long things are going to be difficult. And as I just mentioned, we know in this particular case, at least based on my model, that we’re looking at third quarter of 2024 before the economy’s going to start improving or reversing. So, we’re into it now. We need to be prepared for it. And one of your biggest non-discretionary spends is salaries, payroll. So, get on that quick. Don’t wait until the last minute, because you may find out that you’ve waited too long.
Rob Artigo: There are tough decisions that business owners and managers need to make and be prepared for. For our listeners, please rate this podcast on your favorite platform. And as always, you can reach out to Ray Zinn with your questions at toughthingsfirst.com. There you’ll find the social media links, blogs, and links to information about the book, Tough Things First. Also, pick up Zinn of Zinn one, two, and three. It’ll help you out. Books on entrepreneurship, leadership management, but also on discipline, determination, and life skills. It’s the Zinn of Zinn one, two, and three. Thank you, Ray.
Ray Zinn: Well, it’s good to be with you, Rob.