On the heels of Sequoia’s Coronavirus Black Swan note, waring its founders and CEOs of the business risks associated with the outbreak – begs the question: is your financial model prepared for COVID-19?
In an effort to prevent the coronavirus spreading into a global pandemic, companies such as Twitter, Microsoft and many more are acting swiftly by mandating remote work and reducing business travel to a need basis only (or altogether), while major conferences such as Mobile World Congress (MWC), South by Southwest (SXSW), SaaStr, Facebook F8, and many more have either cancelled/postponed/digitized it’s events.
As global business travel comes to a halt and the economy slows down, we need to factor in how these looming effects can have on our own businesses and plan accordingly by updating our financial models and projections. The goal in building your contingency plan should focus on liquidity inputs to measure the burn rate and runway under ominous top line scenarios. Bringing clarity and visibility is the first step to managing through trying times. Below, I’ve listed some cashflow drivers to rethink in your company financial models.
Enterprise logos: At least in the current quarter and likely subsequent quarter, I would haircut your current new sales projections due to the impeding travel ban. Even in the digital modern era, closing business (especially Enterprise customers) requires lengthy in-person meetings and follow-ups. If your business model assumes a few whales a quarter, best to push those out a couple of quarters.
SMB logos: While the SMB market requires less in-person sales, these company profiles tend to get impacted more by a rougher economy than larger companies with more cash runway and institutional backing. The ripple effect of the SMB market will likely look to extend their cash runway to get through the broader financial uncertainty in the markets. If your customer install base is SMB concentrated, I would haircut your projections as these companies will look to cut their operating expenses.
Sales cycle: The killer combo of companies reducing their budgets to spend on new software and selling over the phone/video will certainly elongate the sales cycle. With less budget, selling will be harder and take longer to convince potential customers your software is priority. Without face-to-face selling, the process to get to the decision maker may take longer as trust will have to be built asynchronously. In your sales funnel assumptions, I would add at least two months to your sales cycle conversion.
Customer payments: As businesses get hit on the top line, I’d expect delayed payments from your customers as they work through optimizing and extending their cash burn. To factor in the delayed payments in your financial model, I would add 15 days to your collections timing so that your model is not overestimating cash.
It will be difficult to time when and how much each business will get impacted by the coronavirus, so it will be important to create a conservative plan to switch to in order to adapt to slowed down growth. To stay ahead of the trough, define your business’s key leading indicators of stagnation so you quickly toggle to your contingency plan.