In times of change, the technology industry — and software companies specifically — tend to adapt quickly. When the coronavirus emerged, many businesses closed their offices and shifted to a now almost universally adopted work-from-home approach. The work-from-home culture had already gained ground in the software space — almost 30% of all remote job postings were in information technology pre-coronavirus, more than any other field, according to Remoters.net. As a result, it was likely easier for software employees to fall into this new way of working than those in other industries.
However, that’s not to say the coronavirus has not affected software companies. IDC’s Tech Index shows a substantial drop in expected IT spending beginning in late February. The index dropped below 1,000 (indicating a decline in spending) in the second half of March.
Like businesses in other industries, many software providers have been forced to lay off employees, especially those serving the hardest-hit sectors like restaurants, travel, hospitality and events. Furthermore, B2B software vendors that sell “nice-to-have” products, including certain point solutions that handle functions not deemed urgent or necessary, will likely be hit harder than those that enable critical business functions like accounting (including payroll), order management and inventory management.
In other words, software companies feel the downstream effects of the industries and customers they serve. Put another way, they need to understand the impact of the coronavirus on their customers’ customers. To prepare their businesses for what’s ahead, those providers need accurate data, now more than ever. Below are a few suggestions to help B2B software companies get through this challenging situation, especially as businesses re-open (some of these will also apply to B2C software businesses):
- Refine forecasting
The current, unexpected circumstances mean sales managers or sales planning and analysis teams need to reforecast. Are the assumptions made earlier in the year about when certain prospects would sign or when customers would increase spend still accurate? Accurate forecasting has never been more critical.
The coronavirus is hurting some industries far more than others (and in fact, it’s sparked growth for some businesses), so accurate forecasting requires software companies to segment customers by industry. The first step in doing that is ensuring customers are correctly tagged by industry in their CRM system.
Organizing customers in this way makes it possible to monitor collections, customer churn and customer acquisition rates, by industry. For example, restaurant and hospitality businesses will likely have a higher default rate than other sectors. On the other hand, healthcare facilities may increase spend to automate as many processes as possible as they deal with more patients.
Additionally, sales reps cannot visit prospects and customers or demonstrate software on-site, which can make it more challenging to build strong connections, even with virtual, video-based demonstrations. How will no face-to-face interaction impact average sales cycle length – even a minor increase in sales cycle length could change forecast models. Firms should expect to offer an increased number of sales options and incentives to spur new sales.
Reforecasting will help guide cash flow management. Sales and sales planning teams must constantly communicate updates to CFOs so they are making decisions based on the latest information.
- Dial back spending, increase modelling
Software vendors must continue to leverage their accounting teams to reduce spending where possible. That could include auditing procurement costs and distinguishing between variable and fixed spend. Cancelling leadership events, cancelling conferences, freezing hiring and delaying capital expenditures for fixed asset purchases are some of the most common ways software businesses are cutting costs. Other ideas including postponing plans to open new offices and freezing spending on consultants and contractors. One positive about virtual product demos is they should lower selling costs.
Business leaders also need to think about how their companies can resume more normal operations as states dial back stay-at-home orders and the national economy restarts. Some software executives have already focused more on the impacts of covid-19 after the worst of the situation has passed. Software CFOs should actively model a few best-case and worst-case scenarios depending on how long it takes for things to normalize.
Worst-case scenarios – which may assume no incoming revenue and fixed costs – could follow V-shaped, U-shaped and Canoe-shaped recovery graphs. Modeling can illustrate how these possible scenarios would affect cash flow, solvency and liquidity, giving leadership the data it needs to plan for each situation. Executives also need to determine what information will indicate the business is moving from one scenario to a different one.
- Prepare for closer inspection from investors
It’s too early to say whether venture capital (VC) and private equity (PE) firms will scale back the funding that so many software companies rely on. However, many will take a closer look at their investments and seek out additional, in-depth reporting to understand what’s going on with their portfolio companies. VC- and PE-backed businesses should have reports that break down annual recurring revenue (ARR) by customer category and other targeted KPIs. Firms should have an actionable plan if large portions of their ARR come from segments profoundly affected by the virus.
Organizations that have lending agreements with covenants from banks or other lenders need to shore up their reporting, as well. Covenants are rules that lenders put on loan agreements with borrowers, and in the software space they may include specific requirements around annual generally accepted accounting principles (GAAP) revenue and ARR. If those are not met, the lender could void financing immediately, so some businesses would need to seek outside funding.
For software companies looking for financial assistance, there are a number of resources available, including loans from the Paycheck Protection Program under The CARES Act, which could be forgiven it certain conditions are met. The Small Business Administration’s (SBA) Economic Injury Disaster Relief loan program is another option. However, the SBA’s “affiliation” rules mean the employees of a VC or PE firm that backs a software company could count toward its total headcount, so it may not qualify for those loans (though there are ways around this).
Many software companies are swiftly recognizing where they can provide value during these difficult times. Food delivery solutions are playing a critical role at a time when restaurants in most states are limited to takeout and delivery. Medical technology companies are at the forefront of cutting-edge research. Video conferencing services are the binding that keeps teams together, even though co-workers may live down the block from one another. Companies are looking beyond their bottom lines to figure out how they can help provide coronavirus relief.
Some of the most successful software companies came out of uncertain and challenging times. Uber, Groupon, Venmo and Airbnb were all founded during or in the immediate aftermath of the 2008 recession. Companies that have no choice but to furlough or lay off employees should try to get creative and innovate. Finance leaders must be proactive rather than reactive. It’s important for software leaders to remember that new challenges bring new opportunities.
Source of the blog: Netsuite blog