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Cybersteel Inc.
376-293 City Road, Suite 600
San Francisco, CA 94102

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Managing Crises at the Company

Business problems occur time and time again, irrespective of whether they are caused by factors internal or external to the company. The core business task suddenly changes if such a serious crisis occurs: everything needs to be done to fend off the crisis. Many small-to-medium sized enterprises are in no way or insufficiently prepared for any type of crises that endangers the future of the company. Frequently, executives at SMEs are taken by complete surprise when a crisis appears on the horizon. The reason for this is that up until then, they had buried their heads in the sand and consciously ignored all the warning signs. Counter measures are then introduced too late, because a sober analysis of the actual state failed to be carried out in time.

Full-Scale Representation of the Actual State

The key to manoeuvring around a crisis successfully is the full-scale representation of the actual state of affairs without any eyewash or palliation. For the analysis, the owner of the business usually needs help to help himself if measures for reconstruction are to be introduced successfully. The events have become like a tidal wave, he has lost the ability to analyse matters soberly, tends towards impulsive decisions, and is no longer capable of continuing to manage the business while starting reconstruction measures at the same time. The symptoms of the crisis are expressed en-bloc through a slump in orders. A decline in revenue results, in the wake of which both yield and liquidity are impaired. The consequences are obvious: on the one hand, a rise in costs and reduction in yield - loss - negative net worth - over-indebtedness; and on the other, a worsening in liquidity - reduction in revenues - payment difficulties -delays in payment - inability to pay.

The (quite human) reaction of the business owner in the face of the apparent crisis takes place in specific phases. On the one hand, he attempts to bring forces into play that reinstall the balance before the specific crisis occurs. On the other, he applies forces to affect a business transformation that aids in avoiding crises of this nature in the long-term. The business owner is hardly capable of solving this conflict of goals alone and requires the advice and assistance of an external business consultant. As time goes on, he progresses from a state of shock, to defensive withdrawal, to final admission. The chance to act productively first kicks in at this point, which then leads to attempts to adapt and change.

However, identifying that the business needs reconstructing cannot suffice as a basis for crisis management. What also needs to be determined by experts and in an objective manner, is whether the business is worth reconstructing or even capable of being reconstructed. Only then can the attempt be made to swing the business' wheel hard left. What is also indispensable is that the company's employees develop the necessary attitude towards the crisis in order to successfully achieve what is often a very radical new orientation.

Powerful and Meaningful Controlling Systems

A company's situation is always critical when the question of time becomes one of survival. A clear sign of this is the critical or even depreciating attitude of the bank when it comes to committing to a loan. They pinpoint the following chain of events: decreasing revenue - reduction in profitability - increase in the debt-equity ratio - sinking cash-flow - waning liquidity. In distributive trade sector the following phases in the process can be added: decreasing market share - declining demand - calculation deviations - drop off in on-time delivery - decreasing stock turnover frequency - decreasing advertising success - smaller penetration. Representation of the current state of the business coupled with an analysis of the completive environment are divided up into four fields of analysis: control of the performance and purposefulness of the existing controlling system. In many SMEs and businesses, controlling - that means a combination of operational steering, control and regulation - does not even exist. Here, the validity of internal ratios, with particular regard to their usefulness for an early warning system, need to be considered objectively. This includes analysing the strategic resources in the business shaken by crisis, the product and service range and the sales assortment, as well as evaluating the company's competitiveness. Frequently, the controlling system in place is exactly the resource that has failed and proven to be unusable for early warning, recognition and clarification. Business opportunities for managing the crisis cannot be worked out in time and effective counter measures introduced.

Minimum System for Internal Ratios

SMEs and businesses have little means and opportunities at their disposal to develop sophisticated forecasting methods. This frequently leads to absolutely no attempts being made to add light to the future of the business supported by specific material and data. Instead of exact data, the classic entrepreneur’s intuition replaces it, which more often leads to assumptions which fall far short of the truth. A crude picture of key management ratios is better than having no data at all. The situation concerning results and liquidity, equity ratio and return on capital, working capital, return on sales and material ratio, share of HR expenditure compared to total operating performance, contribution margin as a percentage of customers, stock value turnover frequency and scope of orders at hand.

Drafting a budgeted balance sheet, a budgeted profit and loss account and a liquidity forecast for the present and following financial year based on the current situation. This makes it obvious in due time that immediate measures to fend off the threat to the existence of the company need to be taken up and where they have to be applied. Of the immediate, individual measures that can lead to overcoming the crisis, securing liquidity has priority. In general, it should prevent financial events spiralling out of control and avoid the immediate collapse of the business. Safeguarding the ability to pay and eliminating over-indebtedness with respect to time as an aspect alone represent two key factors that guarantee that the business can remain active and decisions be made. Immediate financial measures have the central function of ensuring that the liquidity required during the whole restructuring process is available at all times, i.e. that the company is able to pay.

Measures for Safeguarding Liquidity Have Priority

Reducing short-term expenditure, increasing short-term revenue, reversing or at least liquidity-conform adjustment of orders already issued, limitation of all investments to those projects that are unavoidable for securing and developing core business, reduction of service and maintenance to a minimum level, consequent use of payment targets, critical check of advertising budgets, immediate measures to reduce HR expenditure and reduction of stock values. As measures for restructuring, strategic instruments have enormous scope demonstrating medium to long-term effect. Examples of this are the liquidation and sale of parts of the operation. Operative instruments include all measures takes up to achieve transformation of the company. Both dimensions need to be contained in an effectual transformation concept. Besides immediate financial measures, management resource measures need to be taken up as well. What human resources and specialist capacities are available to fend off the crisis?
Close cooperation between external crisis managers and an internal restructuring team has proven effective in the past. In SMEs, this team if often the owner himself, although occasionally a few very capable employees can also be brought into the boat. The actual implications resulting from the planned project measures now need to be included regularly in the already existing budgeted balance sheets, and calculations and liquidity plans. Actual expenditure and yield for each of the projects can be compared with the target specifications on a monthly basis and the chances of success for overcoming the crisis read off. This provides for real-time control of success. The crisis management team needs to completely and continuously inform all parties with a need to know and who are involved in dealing with the crisis about the process of transforming it taking individual instruments as a basis. This creates new trust in the company. A positive relationship and attitude to banks, suppliers, customers and employees rounds off the process of securing the measures for transforming the crisis into a success.

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