What To Do In a Financial Crisis
Touch wood that you never experience a financial crisis in your business.
However, it happens, and it happens to the best of us. No matter how much you think you are on top of your game, sometimes you take your eye off the ball, and sometimes one thing you never watched out for jumps up and – Wham! A financial crisis hits your business – a major account receivable goes belly-up and with it, takes your profits and future cash flow. Or perhaps an employee walks out and takes your business, or maybe even commits fraud over some time and leaves you with a big cash hole. Perhaps you may even have been (or should have been!) aware of a trend that kept getting worse, business fading away?
If this ever happens to you the first thing is to work fast. Stop feeling sorry for yourself and work out a plan quickly.
Put yourself in the big picture.
When crisis happens, it is tempting to burrow down to find the “fault” and to try to fix it. However the “fault” is often a symptom and if you pour effort into it, this may be too little too late.
Better to take a brief step back and see the big picture – make sure you accurately assess your business’ and your own assets and liabilities, make sure you understand your overall income and expenditure. Looking at the big picture can give you a better idea of what happened and why – not just the end results. Understanding your assets and liabilities and income and expenditure should give you some ideas about what resources you have, what risks you need to take care of, and what you can do to stem the flow.
With a good understanding of what happened and how it happened, and knowing what your resources and capabilities are, set yourself some short-term and medium term financial goals.
It might seem a little optimistic to set goals when the ship is sinking, but goals establish what is important. Goals focus the work and removes the panic.
I’m not saying take a week off to hold a workshop and contemplate your financial navel. Do this with immediacy and set goals to pull you out. Set goals to reduce some immediately reducible costs; set goals to save a target of costs by the end of the week and more by the end of the month; set goals to reduce the impact of loans, or to collect accounts receivable faster, or to earn more profit per sale. Make these set, targeted objectives with deadlines – for example “reduce the machinery loan by the end of December so I need to find $X per month from operations”.
From the knowledge and the goals you have established, prepare a budget – and play with it – how can you…what if….to get to the goals. Leave out no options. Depending on the extent of your crisis, it is often tempting to justify certain old established practices or paradigms. You know the ones I mean – the ones where you justify keeping some staff because they have been useful, the ones where you can’t possibly approach your customers to ask for faster payment in case you get embarrassed. Budget for every option that you know can improve the situation – it is better to pare-back your most devastating ideas than not to find the savings because you have not been able to face a few old paradigms.
As soon as you can, remove the impact of debt. Consolidate your debt so that the payments and interest rates are rationalised. Some of your debts – especially credit cards – could be as high as 25% whereas others could be at low bank rates. Look to lower interest. If your cash flow allows pay off the same amount faster, that is instead of paying $4,000 a month, pay off $1,000 a week. This can substantially reduce total interest.
Talk to your bank about whether you can have a repayment holiday. Even if this is only for a few months, it will help cash flow.
On this point, make sure you talk to your bank early. While you may be worried about the action they might take, the chances are they do not want you to go into liquidation where they may lose a customer and their loan. More often than not they will work with you.
Next, while you should recognise that there are not miracles, work on your income and profitability. You might look aghast and say “what more can I do” but there is always something more. You can simply increase prices, you can do more work yourself without increasing your own pay, you can market better and more effectively, you can hold special offers, get rid of old stock quickly for cash, you can find a cheaper supplier. The point is, don’t give up, keep looking for all the bits and pieces you can do because they eventually add up to something.
Finally, as it starts to get better – and trust me, if you see it soon enough and act quickly enough and don’t stop acting it will get better – consolidate what you have done. Safeguard for the future.
Knowing what caused it and how you got it back on track, establish certain policies that you will follow, like don’t borrow more than a certain percentage of your income, or define productivity rules and profitability targets.
Of course, the best way to fix a financial crisis is to never get one in the first place.
I started off by implying that a financial crisis may hit you unawares. I didn’t really mean that. I really meant that if you were unaware of an impending crisis, it really is because you weren’t looking. The signs are always there. So how do you spot them and how do you avoid getting your business into a financial crisis?
Well you’re going to have to keep reading my blog aren’t you? I’ll tell you what the answer this in a future blog article.
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