Many might be surprised that the title of this article is written in the past tense while we are still in the midst of crisis. That’s intentional for not one, but two reasons. First, the time to prepare for a crisis is well before it is ever on the horizon; it’s certainly not in the middle of it. Second, I believe the situation is improving. Whatever the ultimate shape of the curve, hospitals have had time to prepare, pharmaceutical therapies are being researched and utilized, production of critical goods is ramping up, the stock markets are rebounding, the government has responded with a stimulus that we will all pay for later, new social practices are in place and the flaws in the predictive models are being improved. There seems to be a light at the end of the tunnel. I don’t think it’s another train.
The more important pieces I have written over the years which are on point include: Assess The Situation, Is Your Capital Pool Sufficient?, and Working With Your Banker. So, how prepared were you? Let’s measure it. I chose three factors to keep it simple could have easily listed more.
Client Relationships: Are you a vendor who competes primarily on price or do you have a strong value proposition. The former is at high risk during any shake-up whereas the latter is much more likely to survive or even strengthen (read that as an increase in revenue) during chaos. Score: 3 points for strong value proposition, 1 for vendor, and 2 if you are in-between.
Capital Structure: Have you maintained a strong equity position evidenced by cash in the bank, occasional but not continuous use of your line of credit, and modest leverage for your industry? Or do you pull out the vast majority of company profits on a regular basis, are highly leveraged, and are frequently cash stressed (ask the person on your finance team who pays the bills if you aren’t sure)? Score: 3 points if the first sentence describes you, 1 if it is the second sentence, and 2 if you are in-between.
Crisis Impact Potential: Note this is more about your position before the crisis than the actual event itself with the focus on the shock you’re likely to get in any crisis. If your revenue streams are diversified across multiple industries most of which are “essential”, 4 points. Revenue from essential segments of our economy even if not diversified across industry sectors or customers is worth 3 points. Primarily non-essential services but well diversified across industries and/or customers scores 2 points. Heavy reliance on a few customers in industries that are frequently volatile, non-essential or known to be financially stressed, 1 point.
Your score: The range of points is 3 to 10. Lower means you were unprepared and probably severely impacted by current events. Higher represents solid preparedness and most likely limited impact. A mid-score likely implies that even if you were impacted, you can weather the storm. Like most crises, the actual event itself isn’t foreseen. The important point about this exercise isn’t your precise score, but rather to ask yourself how you can increase your score for the next crisis?
I can’t tell you what the next crisis will be or when it will occur. But I doubt this will be the last calamity our world ever faces. Be prepared. Be safe. Focus on the future.
If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to [email protected]
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your cash is flowing. know where.®
Ken Homza
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