Business Survival Tips During a Financial Crisis

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No sugarcoating this – small businesses are struggling to survive. Times are hard and the COVID-19 coronavirus pandemic has created big challenges for individuals and businesses alike. Everyone is trying to get through the crisis in one piece.

Entrepreneurs and small business owners are in a very difficult situation because the burden of leading and making the right decisions for their businesses is on their shoulders.

Why did I highlight the word right? Because you never know what’s right or wrong, just what’s best based on the information you have on hand and past experiences.

How to Lead in a Crisis

Entrepreneurs and other small business owners (and even big business executives) will need effective crisis management and leadership to survive.

Entrepreneurs are generally good organizers and communicators, but now they are required to be good crisis leaders as well. Leadership in a crisis often calls for an autocratic style of leadership because there just isn`t time or room for leverage to follow more democratic or laissez-faire ways of running things. When such challenges are ahead, a leader is required to take matters into their own hands to guide the company towards safer waters.

One very important quality that is required by leaders today is truth, honesty, and a level headed approach. Situations are volatile and unpredictable. Decisions have to be taken on based on current, sometimes limited, information, and entrepreneurial foresight based on past experience. There is a considerable degree of information overload for decision making right now.

Governments are rolling out relief packages, different states are opening up with different regulations, and all the while, new Covid-19 virus research, and statistics are always coming out. Policymakers need to continually adjust based on the latest information. It will be impossible to make decisions that will not change in some form because the crisis is constantly evolving. Entrepreneurs need to stay on top of the latest information to continually be able to adjust their decisions. You can’t think your previous decision was bad. The decision was the best decision at that time, based on the latest information on hand.

During a crisis, leaders want to make decisions based on two priorities:

  • The financial situation of the business
  • The health of employees and customers

In order to get this done effectively, entrepreneurs need to focus on maintaining the cohesion of their teams. A company is not the business name, it’s the people in the company working day-in, day-out to help their customers.

Define clear goals to your team during this crisis. Then you can effectively manage your business in this crisis and get through it in the end.

Be open and transparent with your team regarding the company’s situation. Discuss the information that you considered and the next steps you have decided to take. The toughest decision that entrepreneurs are facing right now is how to balance between financial survival and ethics in dealing with staff and customers. On one hand, costs have to be kept low enough to avoid bankruptcy. On the other hand, ethics have to be maintained as well.

If you want to read more, I write about being a great leader in a crisis in a previous post here.

Assess your Financial Liquidity

PWC published a report where it asked business organizations and management teams to reconsider the going concern assumption and reassess the reserves and liquidity position. This is a general guidance that applies on every business, be it a large multinational corporation or a start up.

PWC published a framework for companies to follow to evaluate future viability in the midst of the COVID-19 pandemic. They have four key points:

  1. Identify significant risks related to liquidity
  2. Develop a plan
  3. Disclose what you know
  4. Understand the impact on the auditor’s report

Entrepreneurs and financial managers need to look at their liquidity to make sure that they have enough cash in reserve. And also consider their ability to generate cash by liquidating assets to keep the business running for the foreseeable future.

Here is a quick list of indicators that you need to keep an eye on during this crisis in regards to your assets and liabilities:

  • Cash reserves
  • Business savings
  • Current ratio*
  • Acid-test ratio (aka Quick ratio)*

The key takeaway here – keep an eye on your liquidity. If liquidity levels are declining, then start paying more attention. Bear in mind that you also need to look at your creditors and debtors. Creditors may ask for repayments for their debt and your debtors may be at the risk of not being able to repay their debt. This type of liquidity situation may lead your company’s situation to go from bad to worse.

Determine your Burn Rate and Runway

Individuals and businesses need to know their burn rate and runway inside-out:

  • Burn rate: Amount of cash that you are burning on a daily, weekly or monthly basis.
  • Runway: Amount of time left till you run out of cash.

Calculate your burn rate and your runway rate immediately. You should actually know it even if not in a crisis. Doing this now gives you a good idea of how long the business can last in this situation. You can then start strategizing according to the environment, cash left on-hand, and your debt.

Mind your Debt and Leverage

Debt is another factor that is very important to be mindful of. Under normal conditions, firms are encouraged to take on more debt because interest payments are tax-deductible as compared to issuance of more shares, which are not tax-deductible. Under these crisis conditions however, debt can cripple your business if your cash inflows have reduced or stopped completely.

Analyze the company’s debt. Divide them into long term and short term debt. Calculate which debt payments are going to start accruing in the short term and see if there’s anything you can possibly do to help postpone the debt payments.

Contact your creditors to see if they can give you some breathing space by deferring your payments. Governments across the world have asked lenders to defer the payments on debt, you may just be eligible for this. Don’t be afraid to check with your creditors. You won’t know what you can get if you don’t ask.

Pay Cuts and Ethical Decision Making

Salaries and pensions are a hot topic these days, especially with respect to ethical decision making. Public companies in most countries have been encouraged to continue giving full salaries and pensions to public employees to help their own personal situations in the midst of the pandemic. Unfortunately, not all companies can do that and the federal and/or state governments have stepped in to assist with resources.

As the larger companies save, there’s a trickle down effect to the small private companies who rely on sales to the larger companies to survive. Large companies are saving money now, so they’re not spending and buying products or services from the smaller companies.

The private sector has been under more stress because unlike the public sector, the private sector doesn`t have access to state or national reserves. Many private companies have laid-off workers, a move that is being seen by some as unethical. However, the state of most private companies is such that they are left with no other option.

If companies are not in a position to pay the salaries of employees in full, company leaders need to look at cutting costs where they can to survive. With burn rate and runway threatening to bankrupt the company, leaders start looking to pay cuts and furloughs.

Be honest with your team when talking about the financial position of the business with them. Let them know the environment, company’s situation and how the decision did not come lightly. Remember, if the company goes bankrupt and the crisis is over, the team would still be out of a job because there’s no company to go back to.

Are Furloughs Necessary?

Furloughs are periods of mandatory time off for employees, without pay. They’re often the last resort for employers when it comes to saving. Employers have to resort to furloughs when economic conditions become very tough for the business.

No one knows how long this crisis is going to last, if you want to remain ethical then you may propose to pay the arrears later when business activity comes back to normal. Companies still need to survive or there

Under present conditions, many businesses have furloughed their employees. Law firms, audit firms, media houses, airline and hospitality companies are among those who have furloughed their employees due to the lack of business activity and the economic conditions.

When deciding whether to send the non essential workers on furlough, entrepreneurs and business leaders must consider both the costs and the ethical impact of such a decision. Keep in mind that unethical decisions or decisions that are perceived as unethical can also have a negative cost impact if they backfire. Honesty and empathy will help immensely through this period of time.

Get great tips on being a leader and communicating with your team in the How to be a Great Leader eBook. Sign up for it here:

Government Assistance Programs (CARES Act)

Be on the lookout for government assistance programs. The US government announced the CARES act, which is a tax relief package for businesses. Governments at this time are rolling out special packages to support small and medium businesses, so be on the lookout to see if your business is eligible or not.

The main feature is the Paycheck Protection Program (PPP) under the CARES act that provides payroll support of up to 8 weeks for small businesses to support payroll. Click here to find out more about the program and see if your business is eligible.

Prevention Better than the Cure

Remember that COVID-19 is a global pandemic that is still developing and its final health impact is still being uncertain. Over a quarter of a million worldwide have already passed away due to the novel coronavirus. That number increases daily.

While businesses are feeling the pressure to cut their expenses and continue their business activities to remain afloat, we can’t forget that the highest responsibility right now is to save lives. Business losses can be recovered, but lives lost cannot be recovered.

Therefore do not take any risk or chance that may endanger your life or the lives of your team members.

If you do decide to continue business during this time, then make sure that you understand and implement all the necessary precautions and safeguards recommended by health officials and the CDC.

As an employer, it is the responsibility of the entrepreneur to make sure that all the necessary steps are taken. Employees need to fully understand and follow the guidelines that are set.

According to the CDC, there are three main areas for employers/entrepreneurs to prepare if they do want to open up:

  • Reduce transmission among employees
    • Encourage sick employees to stay home
    • Identify where and how workers may be exposed at work
    • Separate sick employees from others
    • Educate employees about how they can reduce the rate of spread
  • Maintain healthy business operations
    • Appoint a workplace coordinator
    • Implement flexible sick leave and supportive policies and practices
    • Assess your essential functions
    • Determine how to operate if staff decide they do not want to go in
    • Establish social distancing policies
  • Maintain a healthy work environment
    • Improve controls using the ventilator system of the workspace
    • Implement hand hygiene policies for employees and customers
    • Perform routine cleaning and disinfection
    • Perform enhanced cleaning if COVID-19 positive patients have been identified at the workplace
    • Advise and educate employees before traveling
    • Take care when organizing meetings and gatherings

The first and foremost responsibility of every employer and every person is to reduce the rate of transmission of the virus. Set and follow SOP’s to maintain a safe working environment at all times. For further details click here to find out more about the directives issued by CDC and how you can follow them.

* Current Ratio vs. Quick Ratio explanation can be found here.

Survival Tips for an Entrepreneur / Small Business Owner During a Crisis

The main thing to know is that there are no right nor wrong decisions, only tough decisions during a crisis. The COVID-19 pandemic is a once-in-a-lifetime crisis for many. The key is to take stock of the situation and acquire all the information that you can.

1. Assess your financial liquidity
2. Determine your burn rate and runway
3. Mind your debt and leverage
4. Evaluate pay cuts
5. Make decisions ethically
6. Prepare spread prevention measures if the office is to be opened