The coronavirus pandemic through businesses for a loop. Here's how CEOs can better prepare themselves for economic disaster.
More than half (55%) of tech CEOs were not prepared for the economic downturn brought on by the coronavirus pandemic, a Gartner survey found. The report, released on Wednesday, found that while 43% of tech CEOs were concerned about an economic recession affecting revenue growth, many hesitated in taking action to adequately prepare.
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"The pipeline of opportunities really has come to a screeching halt. It hasn't gone away, necessarily, just that budgets have been frozen. People are cutting costs," said Patrick Stakenas, senior research director at Gartner.
"The biggest impact on tech companies has been that a lot of revenue that was anticipated has just stopped," Stakenas said.
Why executives were unprepared
The coronavirus pandemic hit harder and faster than anyone could have imagined, Stakenas said.
"Back in 2008/2009 when the financial crisis happened, that was more geared towards the financial sector and certainly created a recession. But this is something that's never happened before. It's global," Stakenas said. "Every business in every country around the world is impacted by the same thing. Everybody's had to move their people to virtual."
Looking at preparedness, many organizations are just making financial plans for the immediate future—four or five months ahead. Because no one could've predicted this pandemic, many companies were caught off-guard, Stakenas noted.
Again, looking back to the Great Recession, "Companies that were out ahead of cash, that did have a plan in place to manage the business out for 18 months, succeeded through the process," Stakenas said. "The prepared companies have cash and they're managing their way through this thing."
Mind your cash flow during a downturn
- Consider your cash burn rate
The majority of tech CEOs do track revenue growth and profitability, but only a fraction actually measure cash burn rate. This lack of attention leads to severe cash flow problems, especially during an economic downturn, the report found.
A cash burn rate is found by adding together all operating expenses—salaries, rent, and overhead—and all customer payments. This number measures the entire company's cost impacts and cash usage, according to a press release.
"Perform situational analysis on all the elements that are needed to keep the business alive," Stakenas said. "Prepare for drastic changes, acknowledge with the company and investors that steps are being taken for a positive outcome. Companies just have to manage their cash appropriately."
- Define critical actions for business survival
"Look at critical decisions that need to be made," Stakenas said. "Assess your cash situation.
"If you only have six months of cash, figure out how you can get it to 12 or 18. If you only have three months of cash, then some other drastic things need to be done very quickly," Stakenas noted. "The key thing is for organizations to really focus on cash, get their runway out 18 months ahead if possible."
Stakenas recommended preparing for the future, but managing your business as it is now.
"Right now, your employees are virtual and the revenue engine has slowed dramatically, so manage your business appropriately as it feels today," Stakenas said. "There's no expectation that it will change a month or two months or three months from now."
For more, check out CFOs expect even more layoffs and furloughs as coronavirus outbreak stretches on on TechRepublic.
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