Use cash burn rate to calculate financial runway
The majority of tech CEOs track revenue growth and profitability, yet only a portion currently measure cash burn rate. This lack of focus on cash burn rate has led to severe cash flow problems for companies during the COVID-19 pandemic and resulting economic downturn.
Cash burn rate is calculated by adding all operating expenses – including salaries, rent and overhead – to obtain gross cash burn, and all payments from customers to obtain net cash burn. This measures total companywide cost impacts and cash usage.
“Cash flow is the key measure of success or failure for companies in these current circumstances,” said Mr. Stakenas. “Startup tech CEOs must measure cash flow 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.”
Determine critical actions for survival
If a company has less than three months of cash runway, 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 a sale of the company. If the companyAs of March 2020, 55% of tech CEOs had not begun preparing for an economic downturn, according to a recent survey by Gartner, Inc. With technology companies globally now facing the economic impacts of the COVID-19 pandemic, measuring cash burn rate over time can help tech CEOs calculate a company’s financial runway and assess its ability to survive the current recession.
Gartner’s 2020 Tech CEO Survey was conducted online between December 2019 and February 2020, as the initial wave of COVID-19 cases were being reported across the world but before it was declared a global pandemic on March 11, 2020. The survey was conducted among 285 respondents in North America, Western Europe and Asia/Pacific with the title of CEO or equivalent, at organizations operating in the high-tech industry with an anticipated annual revenue for 2019 of up to $250 million.
“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,” said Patrick Stakenas, senior research director at Gartner. “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, tech CEOs must take two immediate actions to calculate financial runway and determine a strategy for survival.
“Companies who have less than 18 months of financial runway must eliminate all possible costs,” said Mr. Stakenas. “The reality is that startups strapped for cash will need to run the business very lean to survive.”