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Tech firms risk cashflow issues due to pandemic

Analyst Gartner warns that some tech firms may go bust because of inadequate coronavirus planning, and CIOs will need to reassess IT supplier viability

A study by Gartner has revealed that during March 2020, more than half of the heads of tech firms it surveyed said they had not started preparing for the economic implications of the coronavirus lockdown.

The survey reported that 55% of tech CEOs admitted they had not begun preparing for an economic downturn. Gartner’s 2020 Tech CEO survey was conducted online between December 2019 and February 2020, as the initial wave of coronavirus cases were being reported across the world but before it was declared a global pandemic on 11 March. The survey involved 285 respondents in North America, Western Europe and Asia/Pacific with the title of CEO or equivalent, at organisations operating in the high-tech industry with an anticipated annual revenue of up to $250m for 2019.

Patrick Stakenas, senior research director at Gartner, said: “While the survey found that 43% of tech CEOs were worried about an economic recession impacting their revenue growth in the next 12 months, many delayed taking action to prepare for this eventuality. As funding and available capital becomes scarcer in the weeks and months ahead, even after the Covid-19 outbreak slows down, tech companies will have to survive off existing customers and cash in the bank while the current market persists.”

As current economics continue to threaten short- and long-term revenue for companies worldwide, Gartner urged tech CEOs to use the “cash burn runway” to calculate their organisation’s financial position. This is calculated by adding all operating expenses – including salaries, rent and overheads – to obtain gross cash burn, and all payments from customers to obtain net cash burn. This measures total company-wide cost impacts and cash usage, which determines how long the company can remain viable before its funds are depleted.

The majority of tech CEOs track revenue growth and profitability, yet only a portion currently measure cash burn rate. According to Gartner, this lack of focus on cash burn rate has led to severe cashflow problems for companies during the pandemic and resulting economic downturn.

The analyst warned that if a company has less than three months of cash runway, its chances of financial survival are slim. For those with three to six months of cash, survival will require drastic cost-cutting, acquisition of additional capital or sale of the company. If the organisation has more than six months of cash available, Gartner urged tech CEOs to take immediate action to extend this out to at least 18 months to ensure both long-term survival and opportunities to fund the company further.

“Cashflow is the key measure of success or failure for companies in these current circumstances,” said Stakenas. “Startup tech CEOs must measure cashflow on a weekly basis. With a ‘worst case’ forecast in hand, they can determine the crunch points and assess the company’s ability to survive Covid-19.”

He warned that those tech firms with less than 18 months of financial runway need to eliminate all possible costs. “The reality is that startups strapped for cash will need to run the business very lean to survive,” he said.

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