5 ways businesses can proactively plan for disruption
It recently was recently reported in the news that dairy farmers were dumping milk down the drain because there was no demand. Just the day before grocery stores were rationing milk due to oversupply.
This could lead one to think about how the contracts to which our businesses are bound can make it difficult to immediately adapt to sudden market changes. In the case of this news story above, the milk supply chain’s inability to shift immediately not only affected the consumer, but it cost dairy suppliers millions of dollars despite a continuing demand for their product.
Every business owner or corporate officer dreads the late-night weekend phone call to discuss an unforeseen crisis. The crisis might be a major customer that has filed for bankruptcy, which could have a negative effect on immediate cash flow. The crisis could be a significant lawsuit that was filed without warning.
This year we are facing an unprecedented drop in oil prices and the Covid-19 pandemic, which are both once-in-a-generation events. The one constant is that businesses face crises of different degrees all the time – markets shift, demand fluctuates, prices crash, and crisis seems just around the corner; for dairy farmers it happened overnight.
How does a business plan for a crisis, and how does a business protect itself against the severe results that can follow?
Throughout the decades working as restructuring professionals we have learned five areas of focus that can help a business weather significant, acute crisis:
1. Control fixed costs.
If fixed costs are kept in check, a business can weather a cash flow crunch by cutting variable costs and maintaining core equipment and production capacity to weather the crisis. This structure will allow for the ramp up after the crisis has passed by increasing only variable costs necessary to return to pre-crisis revenue.
2. Be adaptable — get creative.
A business can cut its variable costs like direct materials and production supplies. The business simply has to maintain enough revenue to meet its fixed costs and essential variable costs in the short-term.
3. Conserve as much cash as possible and search for more.
Whether in actual cash-on-hand or room left on a line of credit, identify cash that can be used to weather the storm and fund the necessary adaptations to reach your end consumers.
4. Don’t over leverage.
Opinions on the proper amount of leverage vary, but there is little question that appropriate leverage can be used to accelerate growth. However, maintaining control over debt as opposed to allowing the debt to control your business is key. An over-leveraged company or a company leveraged with debt obligations financed at a peak of a commodity market is extremely susceptible to even minor fluctuations in prices that can result in a rapid inability to meet debt obligations. Hedges are a method to protect against the fluctuations.
5. Be willing to make hard choices.
Cutting variable nonessential costs requires making hard decisions. These hard decisions must be made to maintain the core business. If core business is lost then it is impossible to come out of the other side of the crisis as a viable entity that is once again able to hire and expand. Part of making hard decisions is also being willing to take swift and aggressive action to protect the business interest, such as perfecting security interests against a struggling business or litigating to protect perfected security interests. If necessary, a business may seek bankruptcy protection as a restructuring tool. It is important to consider all available tools at hand.
Trying to predict the next crisis is a losing proposition. Rather, be proactive to keep your business nimble and able to adapt.
Our law firm works to help clients during times of crisis, but we also work hard to help clients prepare for times of crisis. As restructuring lawyers and litigators, we help a business structure itself so that it can react almost instantaneously to a dimensional shift.
This may be a time of economic disruption, but it is also a time when businesses with sound financial structures and balance sheets can thrive on the disruption. For example, this can be an excellent time to acquire a larger market share, as distressed businesses fail and are unable to recover. Be prepared to take advantage when the crisis fades away.