A survey by Gartner has revealed that 55% of tech CEOs were not prepared for an economic downturn prior to the COVID-19 pandemic.
The survey conducted between December 2019 and February 2020 found that 43% of CEOs were worried about an economic recession affecting their revenue growth in the next 12 months. But despite this fear, many delayed taking action to prepare for this situation.
The tech stock markets took a hit near the start of the outbreak and IT spending is expected to decline in Asia Pacific from 5.2% growth to 1.2% in the first quarter of 2020.
Even after the COVID-19 outbreak slows down, funding and available capital will become scarcer in the weeks and months ahead.
The Senior Research Director at Gartner, Patrick Stakenas, said: “Tech companies will have to survive off existing customers and cash in the bank while the current market persists.”
Gartner recommends two immediate actions for CEOs. The first action is using and measuring cash burn to calculate financial runway. The lack of focus on cash burn rate has led to severe cash flow problems for many during the pandemic, resulting in an economic downturn.
To calculate cash burn rate, add up all operating expenses like salaries, rent and overheads for a gross cash burn, then add all payments from customers for a net cash burn. This will measure the total cost impacts and cash usage.
Mr Stakenas said: “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.”
If a company has less than three months of cash runway, the chances of survival are slim. Those with three to six months of cash will require dramatic cost cutting or even sale of the company. To prevent this, the second immediate action is to determine the critical actions necessary for survival.
Mr Stakenas added: “The reality is that startups strapped for cash will need to run the business very lean to survive.”
Companies with more than six months of cash should try to extend this to at least 18 months to ensure long-term survival and opportunities for funding. Eliminating costs is essential for companies that have less than 18 months of financial runway.
Chris Ganly, Senior Research Director at Gartner, said: “CIOs should inspect their organizations’ current consumption levels on all variable operating expenses – for example, cloud services and voice and data communications.”
To reduce consumption costs, CIOs should reevaluate tech spending on a service-by-service basis to restrict supply or renegotiate contract terms. CIOs are also advised to anticipate spend increases, as businesses have been forced to invest in remote working solutions like cloud services, IT hardware and VPNs.
Gartner’s survey questioned 285 CEOs or equivalent across North America, Western Europe and Asia Pacific at organisations operating in the high-tech industry with a 2019 annual revenue of up to US$250 million.
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