Small-business payroll software company Gusto cut millions of dollars from its fiscal 2021 expenses — about a quarter of its budget — to remain financially healthy in the face of the downturn, Mike Dinsdale, the company's CFO, said in an Airbase webcast. 

Gusto has cash available to it, part of that from a capital raise it closed last year, but it can't justify unnecessary expenses while the course of the pandemic remains unclear, he said. "We're fortunate enough to be in a position where we have capital."

The company's goal is to control its financial destiny no matter what, so it is driving down costs to the point where it can eke out profitability. That way, it won't have to rely on venture partners to fund its operations and will be in a position to "go hard against the market" when the economy turns around. 

"It's a good time as a finance person to get more air time around some of these foundational business model things that in good times get drowned out by sales and expansion," he said. "So, there's more talk about how to get the company set up in the next year, so when we go back into expansion times, our gross margin" is higher. 

Quick cost cuts

Right off the bat, Gusto made discretionary office and operational cost cuts, including to a food service it offers its 1,500 employees, helping save thousands of dollars a month. Like any company would, Doinsdale said, it also renegotiated its vendor agreements. 

These vendor decisions, Dinsdale said, required balancing both sides' needs. "We're fortunate we can support some of the vendors that support us," he said. "It was important for us to continue to support those folks," Dinsdale told CFO Dive in a follow-up conversation, "and make sure they all of a sudden didn't have revenue that drops to zero and weren't able to pay their people. ... The dollars we were able to continue to pay helped them through the crisis and they ... were able to survive in a different way." 

The company hasn't let any employees go, but it's looking carefully at its hiring needs. It's also deploying some of its sales and onboarding staff to an area seeing a spike in workload: customer service.

"You can imagine customer support is way over capacity right now," he said. "So, we're reallocating folks from recruiting and sales to CX."

Operationally, the company is requiring all hires and other new costs to go through him for the foreseeable future. 

"It's not that I control every decision, but it gives us one place where everything goes so we know there's absolute control," he said. That control, he said, is necessary if your goal is not to cede the financial reins of your company to outside investors or lenders. 

"People will be relieved you've come out with cost control measures so people believe you’re in control of your own destiny," he said. 

One area he’s not cutting: marketing. Although this budget seems like an easy target, since few campaigns are being funded while the economy is down, the money will be needed once the downturn ends. In the meantime, he's using marketing dollars in a way that will help the company and its customers in the short-term.

"We're going to deploy it in places like supporting our customers, discounting, and allowing customers to pause our service," he said. "So, we can support these programs, not so we don't have to make hard decisions around new hires or rescind an offer here or there; these marketing dollars need to be conserved so when we do see the end of the trough, we can accelerate."

Notwithstanding its healthy financial position, the company faces a rocky path. Its bread-and-butter business is providing subscription-based payroll services to businesses with 100 or fewer employees — exactly the sector that’s been devastated by mandatory closures. 

Each year on average about 400,000 businesses are started in the United States and about the same number goes out of business, according to U.S. Census data. In recent years, that refresh rate has shifted, with the number of new businesses dropping to around 320,000, while the number of businesses closing has stayed about the same.

Dinsdale expects the downturn to accelerate that trend. Based on modeling by his finance team, under some scenarios, the number of new businesses could drop as low as 230,000 while closures could be much higher. In past years, they've gotten as high as 600,000, Census data shows. 

"[That refresh rate] may be the lowest we’ve ever seen in history," he said. "Where's the bottom or end of the trough? Three months or six months from now or longer? That matters a lot to us, because of the churn it creates and the net retraction, not expansion, in our base."

Tough times ahead

For the broader economy, the devastation of these small businesses, which employ half of all workers in the country, is already triggering an explosion in unemployment. 

Small companies typically only have three weeks of cash available at any one time, so the delay in getting money to them through assistance created in the stimulus bill could end up being too little too late for many of these companies, said Bill Trenchard, a partner in First Round Capital, an investor in early-stage companies.

"Your only insurance is cash flow," Trenchard said in the webcast. 

The damage to workers is even greater than the numbers suggest; half of all part-time workers, who comprise a big part of the small-business workforce, have lost their jobs, and that number isn't included in the official unemployment count. 

Trenchard said the recovery will more likely resemble what happened after the Great Depression rather than the 2008 downturn. If true, it will be 18 months before the economy turns around, rather than the six months it took after the last crisis, which was a downturn fueled by a drop in real estate values as credit tightened, not a collapse in small businesses. 

"My concern is, it takes a while for people to come back and get rehired, even as the pandemic eases and mandatory closures lift," he said.

To survive, small businesses must tap whatever money they can, whether it's through the federal government's loan program or any venture capital lines they have access to, Trenchard said.

Venture-back debt can be a rough source of money because of the terms it sets, especially if performance measures aren’t met, but if it’s a choice between taking the debt and not surviving, you're better off taking the debt.

"With venture debt, everyone's happy on the upside, but on the downside it gets nasty," he said. "Material changes to the business clauses can be pretty tough, in terms of pulling capital out of your account. However, if it’s the only capital available to you, we’re recommending people pull it down sooner rather than later."

If you wait too long, he said, you're less likely to get any money.

"Most venture debt is funded by banks and their balance sheets are in disarray," he said. "They're pulling back on risk in general. In a couple of months, they might not want to fund that loan when the economy is worse."

To a great extent, how these small businesses fair will determine how well Gusto fares, but Dinsdale thinks his company has taken the steps it needed to, when it needed to, so it can keep its eyes on the future.

"We put in place what I call the no-regrets cuts," he said, referring to cuts any CFO should make if they don't want to look back with regret if their company goes under. "It's not business as usual. Get through the five stages of grief, accept it, because this is what the world looks like."