The pandemic has been a crisis quite unlike anything the world has seen to date. Startups and small businesses have been particularly shaken up, looking for a Plan B and emergency measures.
What has been the impact on different industries?
The effect of national emergencies and social distancing has been the strongest on industries relying on clustering of people. Airlines, cruise lines, and other travel types; conferences, hospitality, and trade shows; movies, sporting events, restaurants, and theaters; and education have, consequently, suffered a huge impact. Many large businesses are shutting down some part of their operations and/or asking their employees to work from home, as part of their changed corporate strategy frameworks.
The effect on gig workers and small businesses has been worse. By definition, their cash reserves are smaller, as is their scope for making errors in the process of managing unexpected downturns. The impact on overall economies from the feedback and ripples from multiple closures is significant, given how people are slowly falling out of work and thereby buying lesser products and services than they would otherwise have.
What would be the right approach?
Business strategists need to operate under the clear understanding that it is no longer business as usual. Entire industries could be wiped out, with millions of jobs taken away, and this has not happened since the era of the Great Depression. The way people work, shop and travel will see profound change, lasting for many years.
The first priority of course will be to keep people – employees and families – safe. Next of course comes the issue of keeping the business afloat.
Which questions must be top of mind for small businesses and startups?
Here are the top focus areas for corporate strategy frameworks at small businesses and startups:
•Duration of crisis: Corporate strategy frameworks must consider the likely time horizon. It seems safe to assume this will not be a short-term matter, so quick cutbacks on typical expense areas will not work. Businesses may need to be reconfigured, considering essentials for survival and thereby what may be dispensable. The longer the duration, the more drastic the change needed to the business model.
•New business model: Typical assumptions about sales cycles, customers, and runways will change, implying the need for new business models. There may, for instance, be no more funding, so runways might just disappear. Business models must therefore change too, checking the previous optimistic assumptions and studying how valid they remain in the changed business context. It is critical to be clear about the present receivables and how the changing business environment has affected the burn rate and runway.
•Burn rate and runway: The gross cash being spent every month is referred to as the gross burn rate. It is important to study this and analyze the shares of fixed and variable expenses. Compare this with the real revenue – not the forecast – coming in every month. This will possibly be nil for companies at the early stage. The difference between the gross burn rate and the monthly revenue is the net burn rate. A sub-zero net burn rate is common for startups and points to the amount of money lost each month due to expenses exceeding revenues. When this is compared with available cash in bank accounts, the business strategist will uncover the survival window, also known as the runway, after which the company will have no money left.
•Investor responses: Capital comes from investors, who will be quite concerned and maybe considering similar factors as the businesses are. Valuations could crash and venture capitalists could rule the market, with late-stage financing suffering the highest impact.
It is important to act as soon as possible, keeping not just the business but its people in mind.