Last week’s doom & gloom CEO summits, venture capitalist advice and angel investor emails have shown how broad the sentiment is that Silicon Valley is going to go through a major business downturn. Taking the downturn as a given let's look at what you need to create an action plan on how to survive and prosper; it isn't enough to just cut costs and increase revenue.

In my 12 years in Silicon Valley, I’ve experienced the tough choices that have to be made for companies to survive. From restructuring my own venture backed company to being a senior executive as a public internet company during bubble 1.0, I’ve seen everything from multiple rounds of lay offs (the proverbial death by a thousand cuts) to default notices from venture debt providers to renegotiations with VCs and service providers. It can be a long tough road but it pays off for the survivors.

Below is a 7 step action plan for cost cutting and restructuring. No matter how my business was doing, I would take this opportunity to go through each of the seven steps and rethink people, expenses, processes and economics.

1. Discontinue All Unprofitable Sales & Marketing Activities There is a very simple formula to determine what sales & marketing to keep or turn off. For marketing programs, if they are not ROI positive today, cease them immediately. For sales programs led by sales people, it’s a similar formula: Take the revenues brought in by the salesperson then subtract her salary, commissions, taxes, benefits, etc. As long as that person’s total compensation is substantially less than the sales he brings in, keep him. Otherwise, you’d be better off losing the sales in the short to medium term and conserving the cash.

2. Stop Focusing on Product I know this is going to be antithetical to many start up CEOs. However, your VCs are focused on revenue and profitability right now. Hence, this is probably not a great time to heavily invest in the product unless you think those investments will pay off in near-term revenue.

   What you probably need at this point is a product person and a small team of engineers to maintain the product. Yes, I know how hard you worked to build a great engineering team. I did it too and when I had to let my engineering team go, I was in shock. It took me so much time and so much recruiting money to find a decent engineering team, it was difficult to even think about downsizing. Unfortunately, I couldn’t ignore the hard facts necessitating cash preservation. And frankly my users were more concerned that I could keep the product that I had running, rather than trying to improve it with an end result of not having it at all.

3. Reduce Headcount Cutting staff is the hardest thing to do but it’s the most vital as well. Be bold. If you think you need to cut 20% of your work force, then cut 35%-40%. I’ve never seen a situation where I thought I cut too many people. Instead, I’ve had experiences where my superiors weren’t bold enough and we ended up doing layoffs four times within a few months. This was bad for morale, the bottom line and for the business.

   If there are a few folks that you think you could use short term but don’t really need in the long term, give them notice now but let them have a transition period. You don’t want to be faced with another round of cuts in a month or two.

   Outsource whatever tasks you can. Hire contractors - although some may seem more expensive than employees, you don’t pay them benefits, taxes, vacation, etc and you can let them go at anytime without the guilt of not paying them severance.

   You can also use this opportunity to upgrade your team. Take a few months, see how you do with a smaller team and if you have the luxury to hire again, you will probably find some great people.

4. Keep the “Do-er” Employees What employees would I keep? I would keep the do-ers. The people who actually are on the front lines running the business day-to-day. People who are working with the customers, partners, vendors, etc. The ones that make stuff happen in the company.

   In today’s market, you don’t need a lot of senior people to ‘strategize’. You need people who are heads down executing. Specifically, in addition to the small engineering team and profitable sales people, I would keep some customer service reps, and a finance person who can aggressively renegotiate contracts and hawkishly watch the bills and cash burn.

5. Renegotiate Contracts / Cancel Services Review every contract. Don’t assume that you’re stuck with long term contracts. Any deal can be renegotiated. Determine what your leverage is and how you can use it. From my experience, partners and service providers that agree to renegotiate sooner rather than later usually get the best returns.

   For services and partners that you no longer need, cancel them immediately. Do you really need that phone system? Are you using Omniture or can you just switch to Google Analytics? Do you need those additional seats in the CRM system? Is the SEO consulting firm making a real impact on your rankings? Do you have too much space for staff? Should you consider subletting? Ask the questions.

   For early contract cancellations, negotiate early exits even if you have to pay a bit upfront to get out. My general strategy has always been to explain to the partner that that they are lot better off getting something today then nothing tomorrow (and yes, that is a real possibility).

6. Stay Ahead of VC Debt Issues If you don’t have any VC debt, you can skip this section. But I know many start ups today have VC debt, as I did. And you will have to deal with the consequences of having debt obligations as I did. When I told my debtors that I was no longer looking to raise another round of financing for my start up, but rather wanted to restructure the business to make it more viable, my top tier VC debt firm that was recommended by my VCs, sent me a letter of default and froze the company’s cash. I worked it out with them but it was a tough road and forced me to make decisions for the company that I wouldn’t have made alternatively.

   So many startups today have VC debt and with an environment where the VCs are publicly telling everyone that it’s going to be tough for startups to raise funds, the companies with only a few months of cash could be in some trouble from their debtors. Technically, if you or your investors think you can’t raise more money to keep the company in business, the debtors could determine that your business has had a material negative change and could ask for their money back.

   If you accept that theory, many VC debtors could start getting really nervous about their investments and start taking a much closer look at their portfolio and asking some pretty tough questions. Some of them may have the right to pull their funds. If you fit this category, engage your investors in talks with your debtors. Create a plan that will make your investors and VC debtors feel comfortable with your ongoing strategy but whatever you do, don’t sign away rights to your IP.

7. Know Your Cash Position & Stretch Out Your Payments to Vendors Since cash is king so track your cash balance daily down to the last dollar. That means track uncleared checks, upcoming obligations, cost cutting expenses, etc. Extend payments to your lawyers, accountants, and other service providers who can afford to wait a month or two to get paid. Turn your payments into a net 90 payment cycle rather than a net 30. They can afford to wait and you can increase the flexibility of your cash flow.

Going through this action plan and doing everything on it is not easy. It emotionally heart wrenching but it has to be done if you want to come out on the other side and in one piece. You have to believe and make your team believe that this new thinking will make your company stronger and more efficient with the best chance for future success.