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.
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 Patrick Stakenas, senior research director at Gartner.
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 company has more than six months of cash available, tech CEOs should take immediate action to extend this out to at least 18 months to ensure both long-term survival and opportunities to further fund the company.
“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," conluded Stakenas.
