How to overcome or prevent a business crisis
What could you do to overcome or prevent a business crisis? Hopefully, you have read the first part, “Signs of a business crisis”.
4. Measures in the crisis
Search for somebody, to assist you with your Accounting and Controlling, who is able to adapt your controlling and delivers the really important data to you. As you see from the above, it’s not about massive amounts of data.
Speak early with your bank as well as with bigger suppliers and explain your situation, the earlier, the better. In most cases, the crisis could be overcome by openness to all involved parties.
Use all alternatives to get capital into your business, but don’t sell yourself. It would be better to improve your accounts receivables management to collect receivables faster.
Factoring is a way if you urgently need money. If you are in an overdraft position with your bank accounts, you may ask to refinance it into a long-term loan, this will lower your interest expenditures.
Perhaps, you have the possibility to gain capital from government grants, so that you could continue working with your company.
However, you should not count on the possibility to receive government grants, your business might not be eligible. Tighten the operational organization (order processing, customer care, etc.).
Keep an eye on the solvency of your company, this is the most important. At the 2nd step, the ability of competitiveness is critical.
When you have secured these both conditions for the survival of your business, you could go to the 3rd step, the expansion, or the gain of higher gross margins.
In real life, these three will be switch back and forth anyway.
5. Actions to prevent crisis
Use a business ratio system which shows you the most critical numbers of your business. The following ratios belong to the most important ones:
- Equity Ratio (at least 20% and more)
- Return on Sales (at least 3 to 5% and more)
- Cash Flow Margin (at least 3 to 5% and more; but: must be higher than Return on Sales).
Furthermore, you should keep an eye on the following values:
- Cash on Hand (must be at least at the height of the Payables due at short notice)
- short-term and medium-term Payables
- total of accounts receivables (money you lend your customer with long payment terms, you can not work, that means: the lower your receivables, the better for you)
- Inventory (this could bind a lot of money)
- Order Backlog and the time range this order backlog keeps your business alive (get this values in relation to your companies’ capacity, so you could see which capacity or order backlog you will need to survive)
Actions in or before a Crisis
Create an early warning system, with the above-mentioned values, and you have a starting point. Keep your system small and clear.
Look straight for early indicators (data showing trends before the accounting data comes into force).
The incoming orders are one of them. Do not blow up the Controlling needlessly. Pay attention to data which help you to manage your business.
You know these data mostly from your everyday work, you only need to bring them in a useful form.
Even if your business runs well, you should have everything under control in your company, because it could turn around fast.
Tolerate no negligence such as excuses like ‘no time’, ‘it runs very well at the moment’, ‘I have everything in my head’, ‘my people will do it’, etc.
You are the boss (or at least somebody who has relevant influence) and the one who mostly influence the destiny of your business. Go ahead with good example.
Now you have an overview about possible signs of business crises. Do not take this article and its meanings too seriously. But also do not pretend the danger is not there.
Just because one month your sales volume is a little falling, does not mean you are on the way into a crisis.
Deviations in your numbers should always animate you to perform deeper analyses. And if the analyses bring nothing special to your attention, you should observe the analyzed positions during a longer period.
Should you get into a serious crisis, and you may not see any alternatives to handle it, please look for professional consultancy? The earlier, the better.
All the best and lots of success, thus you never need to overcome or prevent a business crisis.