How Startups Should Address the Financial Implications of the Coronavirus Outbreak
The coronavirus outbreak is an uncertain and rapidly evolving situation.
At Burkland, our first and foremost priority is safety and health. As a company, we are following the CDC’s recommendations on COVID-19 and are taking the health of our employees, families, clients, and partners very seriously.
We are also helping our clients as they prepare for the uncertainty of the coronavirus outbreak. The risk of economic challenges has heightened dramatically. Unpredictability when it comes to the economy and the impact on business decision-making is real — whether the downside eventually occurs or not. When economic uncertainty increases, the downside scenario in future-focused financial models becomes more likely, and sometimes more dramatic. As a result, the risk-adjusted expected outcomes change in a downward manner. And, this is what the business needs to use to make optimal decisions. Proactive CEOs objectively look at this updated reality and take action. Burkland CFOs are working with their clients on contingencies and updates to their financial models now.
At Burkland, we find a robust and unfiltered review and discussion of downside scenarios in a business’s financial model. A prudent plan to address the financial implications of COVID-19 at this time is vital. COVID-19 has already caused uncertainty in the market and the impact is being reported daily. Startups must make adjustments to their planning now. Important questions to ask include the following: What if revenue declines 50%? What if customers start delaying payments? What if fundraising starts to take longer (a likely scenario which we are already seeing markers of now)? What actions now would help reduce risks should the above play out? And, just as important, if the business is in a strong position (an easy example would be a startup that has 2 years of cash), what investment opportunities are there?
We queried our CFO Services team and here are our recommendations for startups:
Coronavirus Outbreak Financial Considerations
- Consider cash conservation. At times like these, it can make sense to avoid decisions that commit to increase future expenses in a more permanent way (i.e. by hiring more full-time employees). Consider more flexible alternatives, including delaying hiring and reframing your model for how much revenue is needed before hiring another employee.
- If your business has less than 9 months of cash, consider accelerating the close of your fundraising. For example, if you are currently raising don’t worry about small legal terms or explore establishing a bridge financing. Even companies with 12 months of cash should consider this action since a hit to revenue could shrink the cash runway. Also, consider adding venture debt.
- Work with your CFO and finance team to develop contingency plans for a possible revenue decline. Model what the P&L and, importantly, cash looks like with 20-30-50% declines in sales over various time periods – this quarter, next half, full-year – and model other high-risk scenarios.
- Develop cost-saving measures that can be implemented quickly (trim marketing and sponsorships, reduce travel, review new hires, etc.) for both minor and worst-case revenue decline scenarios. Use the models you built with your CFO to look at longer-term cost reductions like layoffs if need be.
- Continue to work with your CFO and finance team as market conditions change.
- Plan for employee absences – check remote technology access and security. Communicate a policy so employees know they should stay home if they or their family members are sick.
- Have project plans for the next 6 months documented for all employees so company deliverables do not slide.
- Identify essential functions and the employees who are responsible. Create a redundancy plan so operations are maintained even during employee absences.
- Work with suppliers and vendors on their planning and potential production/delivery delays that might impact your product development/business.
- Implement a robust communication plan. Communicate frequently and transparently with your board, shareholders, and investors. Be upfront about what the company is doing, planning to do under different scenarios, strategy and forecasting changes, updates on staff and other changes.
As well as our recommendations, Sequoia Capital’s recent letter to its Founders and CEOs has valuable advice.
At Burkland, we recommend that our clients take a sober look at their business and new risks. Uncertainty in the economy has a real impact, and startups must update their models and plans to address it. No matter how the COVID-19 virus plays out, uncertainty in our economy is already here. Burkland is here to work with startups on this critical planning. Above all, please take care of yourself and your family.