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Business Development & Marketing Cash Flow & Forecasting Finance General Insolvency

Are you prepared for the next crisis?

crisis preparationFinance may be a primary consideration but it is not the only cost to a business in preparation for a crisis.
Being ill-prepared can damage the relationship with customers and employees, and ultimately, if the crisis is badly handled, it can damage the business’ reputation.
Complex, fast-moving threats to organizations can happen at any time, so being prepared for a crisis is about having the right people having been trained with communication tools and strategy in place ahead of an inevitable yet unforeseen event.
Business management consultants Mossadams produced a useful cost management guide to dealing with a crisis in April 2020, which sets out six elements to pay attention to. These are strategy (covering a customer analysis, product mix, recovery plan and financial forecast), assessing operating models, the trade-off between risks and opportunities, a situation analysis and a financial analysis.
According to the Harvard Business Review “When companies seem ill-prepared in the face of a crisis, the first question people ask typically is, “Where was top management?”
Ideally, it advises, boards should dedicate a block of time each year to better understand and prepare for major threats to the business.
It advises that boards should have both a strategy and a core team at board level trained and ready to deal with the crisis itself, as exemplified by the UK Government’s Cobra (Cabinet Office Briefing Room) group.
Of course, for a business facing a crisis the key is to take control of the messages and immediately review finance. While directors might worry about a hit to profits, in fact they should first and foremost have a plan in place for controlling expenses and for protecting and managing cash flow. Of course, ahead of the event it is wise to build up some financial reserves and to avoid taking on debt wherever possible. The less outside funding a business has to sustain when dealing with a crisis, the better.
Part of preparation for a crisis, however, and arguably as important, is the way it handles its messaging and nurtures the relationships crucial to its continued existence.
Stakeholders, customers and employees are likely to be panicked and worried about their future so communication is essential, not only to keep people informed and reassured in the present but also to protect the business’ future once the crisis is over. Indeed, critical to any crisis is to plan for emerging from the crisis so that the business does not remain in crisis mode.
In a crisis, everyone becomes acutely aware of the behaviour of others. This is therefore a key factor for reassuring stakeholders.
In this context, it really is a case of leading by example, so, perhaps it would be unwise for a business to pay out dividends to its CEO, when others are having their working hours cut or suppliers are receiving fewer orders because a business is scaling back activity..
The lesson is that preparation for a crisis is infinitely preferable to being faced with reaction without it.

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Banks, Lenders & Investors Cash Flow & Forecasting Finance General

The Phases for dealing with a pandemic involving Zoonotic diseases

dealing with a pandemicIn 1999 the WHO (World Health Organisation) devised a blueprint based on Phases for dealing with a pandemic, subsequently updated in 2005.
It set out six Phases, to provide a global framework to aid countries to prepare for a pandemic and plan their response.
The first three Phases cover animal transmission escalating to domesticated animals and eventually germs spreading to humans defined as a Zoonotic disease. These initial phases also deal with the preparation, capacity development and response planning activities, while the last three Phases deal with the response and mitigation efforts when a disease transmits from human to human.
Phase 4 deals with verified human-to-human transmission of an animal or human-animal virus and its ability to cause “community-level outbreaks”.  Phase 5 deals with the human-to-human spread of the virus into at least two countries in one WHO region and the sixth Phase is the Pandemic Phase where virus transmits from human-to-human in at least one other country outside the region identified in Phase 5.
These are relatively straightforward definitions, but how different governments, businesses and people react to them is another matter altogether.
As has been clear during the current Coronavirus Pandemic state-level reactions for dealing with a pandemic have varied widely both in the state measures adopted and how stringently they have been implemented, with countries like South Korea at one extreme imposing a strict lockdown and restriction on movement from fairly early on when there were just a few cases, to Sweden, which has imposed relatively few restrictions and no lockdown.
However, the disparity in various state reactions to dealing with a pandemic has arguably informed the way both citizens and businesses have reacted. In the UK much of the initial focus was on the economic impact with the Chancellor introducing a wide range of financial support measures for both businesses and employees. However, some argue that the initial infection control was not as stringent as it might have been.
Scientists at Harvard university have mapped the behaviour of people in response to a Pandemic and also identified similar Phases of reaction to those set out by the WHO.
Initially, their research found that in the case of a severe Pandemic, the initial reaction by people when they become aware of a risk is to overreact. They become hypervigilant, pause “normal” behaviour, and “take precautions that may be excessive, may be inappropriate, and are certainly premature” – such as panic-buying toilet roll and other supplies as happened in the early stages in the UK. This, they say, is not the same as panic.
The scientists argue that this is entirely appropriate early in such a crisis because it means people then become able to cope with the crisis.
However, the alternative reaction is denial or even anger and in the early Phases inaction as a response is counter-productive since people don’t take precautions. Examples include those, such as in Michigan, USA, who protested against lockdown measures.
Michigan epidemiologist Sandro Gales has identified five Stages of reaction to a major disaster: starting with self-preservation, moving through group preservation to blame setting, justice seeking and finally “renormalizing” which can mean adaptation to the threat.
These are similar to the five Stages of grief: denial, anger, bargaining, depression and acceptance as identified by Elisabeth Kübler-Ross who also found that a lot of people get stuck in one phase or another and some take a long time to reach acceptance of the situation.
How well a country copes with a crisis, therefore, depends on how its leaders manage both individual perceptions as well as vested interests such as those of business. This is improved by radical transparency when they don’t know the answers but their honesty about what they do and don’t know and what they are doing will help reassure everyone that they are doing their best.
The fact is they will make mistakes but so long as they make the best possible decisions based on expert advice and the information available then they will convey confidence that they will eventually find a way through the crisis. There is no doubt that many with the benefit of hindsight will seek to hold them to account but there are lots of armchair warriors and very few leaders who stand up and take difficult decisions.
Understanding and managing the different Phases of a Pandemic and the different stages of reaction to a crisis are particularly important as they inform what messages to convey, where people may misunderstand messages such as when restrictions, as now, are being eased while at the same time there is a need for maintain a level of vigilance.
Perhaps we shall know the Pandemic is over in UK when we see the House of Commons packed with MPs given that so many are classified as vulnerable being over 70.
 

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Banks, Lenders & Investors Cash Flow & Forecasting Finance Insolvency Turnaround

Running out of cash – crisis management, the first step in dealing with a cash crisis

crisis management when running out of cashCrisis management when a company is in financial difficulties is about quelling the understandable panic and taking a long, hard look at managing the business’ cash flow and the potential for action that makes the business viable.
Running out of cash is the cause of most business failures where the cash flow test of insolvency applies such that a company is insolvent if it is unable to meet its liabilities as and when they fall due. This doesn’t mean the business should be closed down but it does mean the directors should take clear steps to deal with the financial situation.
The first thing directors need to appreciate is that their primary consideration is to protect the interests of creditors rather than that of shareholders. This is where an insolvency or turnaround professional as an outsider can help by bringing an objective assessment of the personal risk when making decisions and the prospects that turnaround initiatives can be taken to restore the business to solvency.
Initial action by experienced turnaround professionals will focus on the short term cash flow while at the same time they will consider the medium and long term prospects for the business and whether the business model works or needs to be changed. This may be contrary to insolvency professionals who may be interested in justifying their appointment under a formal insolvency procedure.
Any review by professionals will consider how financial situation developed where it often the case that over time creditors have been stretched. Indeed, there are many reasons for the shortage of cash that often leads to a delay in paying suppliers whether this is due to a decline in sales, poor debt collection, bad debts, inadequate credit control, over trading, over stocking, funding investments and growth that doesn’t translate into sales or indeed myriad other reasons.
Guidance from the ICAEW (The Institute of Chartered Accountants in England and Wales) is that at this stage:
Getting cost controls properly in place, insisting all purchases (however small) are signed off centrally by the managing director or finance director, chasing harder to collect outstanding debts, or agreeing new payment terms with creditors can have a quick impact and help ease an immediate crisis.
The most likely immediate priority in managing a liquidity crisis is reducing costs while maximising income.
So, the first step in managing cash is to construct a 13-week cash flow forecast to help identify risks and actions that can be taken to reduce them. It should include income from sales and other receipts and outgoings, both to ongoing obligations such as rent wages and finance and to creditors.
The business also needs to control cash on a daily basis, with payments made on a priority basis with purchases approved by an authorised person who is aware of their impact on cash flow.
This will avoid the risk of returned cheques. It is also advisable to talk to the bank and keep it aware of what is being done to keep things under control.
This is the first step in crisis management when a company is having financial difficulties, but thereafter a restructuring adviser can be invaluable in taking a long, hard look at the business operations, its processes and its business plan to identify areas where performance is weak or unprofitable and whether and how the company can be returned to profitability if these elements are removed.
Getting external and objective help is likely to be necessary and my guide to running a business in financial difficulties is a useful reference.