Should you prioritize growth or profitability in a recession? The answer may surprise you.

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This year has seen economic slowdown, inflation and war combined into a cocktail that is now fueling fears of a recession across all business sectors, throwing everyone from business leaders to investors and employees into uncertainty. Such uncertainty is forcing business leaders to reprioritize and scale back their once ambitious growth plans. And now, as interest rates rise and valuations fall, more and more companies are returning to prioritizing what was once the only way to ensure a company’s success: positive free cash flow.

All of this is a very strong reminder to all businesses, but especially startups and small businesses, that building a business to make money is vital, both in good times and bad. Prioritizing free cash flow is the only way to manage against forces outside of your direct control.

Related: Never Worry About Cash Flow Again Using These 5 Strategies

Positive free cash flow is not a luxury

Many entrepreneurs, especially when starting their businesses, start out with a deficit. While this is to be expected (“You have to spend money to make money,” as the saying goes), too many companies, especially in the last decade, have spent too much time in the unprofitable growth stage. Many notable technology companies are now facing difficult decisions with real disruptive and fallout effects, including drastically reduced investments and layoffs.

This recent and all-too-common strategy of sacrificing profitability for growth can and has worked for some companies. Public and private capital markets facing a low interest rate environment have become heavily anchored in the high-growth segments of the economy to deploy their capital. This excess capital has distorted the long-term drivers of business value, namely the relationship between the rate of growth of revenues and free cash flow margins. Given the valuation rewards, many have built their businesses solely for high growth at all costs.

For most companies, the priority should be profitability and free cash flow as the norm. Many business leaders may be surprised that doing so has no material impact on revenue growth.

Frankly speaking, if you run a $100+ million organization that’s just burning through cash, it’s a hobby. That doesn’t mean leaders shouldn’t invest in the business, it’s simply a matter of prioritizing investment with the goal of also generating positive free cash flow.

Businesses are meant to make a profit. While Wall Street has recently been exceptionally lenient on growing but unprofitable companies, historically this has not been the case. With extremely low interest rates since the 2007-08 financial crisis, there have been few or no penalties for taking risks at fast-growing but cash-burning companies. The phrase TINA (there is no alternative) arose as a result of extremely low interest rates that provided a significant incentive for investors to pursue growth without considering risk, since they had little opportunity to earn returns with less risk. However, with the normalization of interest rates, there are very real investment alternatives to high growth, and valuations for growth have dropped substantially as a result.

Now that we are trending toward a “normal” economy as interest rates return to long-term historic levels, it is time for business leaders to get back to managing their business operations for these “normal” times. Access to capital is going to be more difficult now, and investors will demand a better balance between growth and free cash flow after the initial phases of product-market fit are established.

Related: How to Stay Profitable in a Changing Market

Prioritizing what’s important

For small business owners and startup founders who have been less concerned with generating free cash flow and are looking to beef up their balance sheet, there are a few things they can and should do right away.

First, you need to determine the math that will allow you to control your burn. You and your team must find a realistic revenue path and breakeven point. Without realistic expectations for your short-term and long-term fixed income and expenses, you and your team will never be able to plan for responsible, realistic, and profitable growth.

Once you have your income and breakeven, you should be able to figure out what you can plan to spend. Armed with that spending number, it’s time for leadership at all levels to look at how their activities connect to revenue. This is where you need full buy-in from your team and probably a significant mindset shift.

People get sloppy in the good times, which we’ve all been lucky enough to enjoy over the last decade. There is more room for experimentation when horizons are far, but now that horizons are getting shorter, cakes are shrinking and forecasts are becoming less optimistic, business leaders must be ruthless in prioritizing revenue-generating projects; everything else should be seen as a luxury. Projects outside of the revenue generators will likely need to operate on a shoestring budget and with more creativity or be left on the shelf until the sunnier days arrive.

Being honest is going to be important here. Be honest with yourself as a business leader about your growth and spending trajectories, with your team about what can and will be prioritized, and with investors about what you’re doing to generate cash flow. Setting these expectations will be key to keeping your employees motivated and engaged during what can be a stressful time.

Related: Positive Cash Flow and Smart Financing Solutions

Focus on productivity

As I have seen several business cycles come and go, there are always two terms that seem to come back with a bang in every recession: efficiency and productivity. While there is nothing wrong with running an efficient operation, it seems to me that many companies and leaders only prioritize efficiency when times get tough.

Instead, I wish leaders would focus more on productivity. For many, it will be a throwback to the early startup days when equipment was sparse and rudimentary. It’s amazing what teams can do when they focus on making the biggest impact on the highest-priority work. Get your teams focused and aligned on the right things, and weed out low-priority items. You will be amazed at what can be achieved.

There’s nothing wrong with making operations more efficient, but this can’t and shouldn’t be a short-term fix that vanishes the second things look better, and it shouldn’t be focused on productivity either. If we come out of inflationary and recessionary periods and your team goes back to prioritizing growth over cash flow, you’ll likely find yourself in a similar situation the next time markets start to fall.

Related: Why Founders Should Focus on Productivity Instead of Efficiency

It is easier to burn cash than it is to generate positive free cash flow. That is, it is easier to postpone difficult decisions than to make them now. If the past few years have taught us anything, it is that the future is unpredictable, and businesses, especially SMBs and startups, would do well to reinforce a safety net built on profitability. Be realistic with your revenue and expense expectations, and prioritize projects that represent the best opportunities to drive growth and efficiency. This will allow for long-term sustainability in good times and bad.

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