When business disruptions occur, it can be expensive. Most business owners and CEOs have a model for success in mind, but what about the other side of the coin? Failing to prepare or put contingencies in place for unexpected events can turn a potential blip into a catastrophe.
Increasingly, business owners and leaders are leaning more on their financial teams to help prepare the company for uncertainty. Specifically, the business's CFO is taking on a broader role that includes making sure that your firm will be able to weather unexpected events.
The Evolving Role of the CFO
While your company's CFO has always been the financial backbone of the business, forward-looking and strategically focused, too often their role is misunderstood and confused with that of a controller’s. An excellent overview by Dave Saporta describing the difference between a CFO and controller can be viewed here >
Technology and big data have advanced the financial management end of this function to the point where automation is now possible in some areas. CFOs are now shifting their focus and expertise to include a new kind of strategic planning and guidance and plays a role in preparing your business for unexpected events.
Unexpected Events That Could Become a Business Crisis
By definition, the "unexpected" could occur at any time. Even if you have the best product or service idea and the most innovative marketing plan, no business is bulletproof. When you are caught unprepared, an unexpected event could become your company's greatest vulnerability and even its downfall.
Imagine a future in which everything you planned for your business materialized perfectly. Customers show up in droves, the economy booms, suppliers are a dream, and there are few if any competitors. Ideal, but not likely. Now imagine one in which few things go as planned and there are even some strange curveballs that could be game changers for your company.
What unexpected events could impact your business? Unfortunately, there are many.
Following is a list of potential unpredictable events that could lead to a business crisis if you are unprepared:
- Death. What is your continuity plan if a company founder or majority owner dies?
- Divorce. A business that is "family-owned" could face disruptions due to divorce.
- Injury, disability of key executive. Does one key executive hold all of the expertise or data necessary to operate the business?
- A financial hardship. Is your company's cash management where it needs to be to weather unforeseen events? Do you have access to lenders for emergency liquidity?
- Loss of key salespeople. A sales-driven organization could suffer losses if key salespeople are unhappy or are otherwise lost.
- Loss of large client/customer. If a majority of your revenue comes from just one client, you risk significant losses from this lack of diversity.
- New government regulations or taxes. Some government regulations are favorable to businesses, while others are having an unexpected effect.
For instance, Mayor Jenny Durkan signed Seattle's controversial new employee tax into law the evening of May 16.
The law imposes a tax of $275 per employee per year on companies grossing more than $20 million in Seattle. It includes a sunset clause after five years, with renewal requiring a council vote in 2023.
The law will take effect Jan. 1, 2019.
- Public relations ‘nightmare.’ PR nightmares happen to both responsible and irresponsible companies. You'll need to be prepared regardless of your policies.
- A natural disaster. A natural disaster can not only threaten the lives of your employees and customers, but it can also devastate your company financially.
- Legal dispute. You always run the risk that a customer will file a product liability claim or there will be some other legal case that threatens your business.
- War. The threat of a military conflict on U.S. soil is low, but it still exists. You may, however, lose key personnel to deployment overseas.
- Political unrest. The world isn't what it used to be, and there is a real chance that political unrest could impact your business.
- Competition. If your company has a competitive advantage, this may not last forever. There is a real risk that a competitor will create a better product or outmaneuver you in other ways.
- Supply chain disruption/failure. An unexpected event for a supplier could translate to one for you as well. You may also lose trusted suppliers for other reasons.
- Loss or corruption of customer data. Data breaches are becoming more common and could ruin your reputation with current and potential clients.
- Disruptive innovation. Your product or service may have been "cutting-edge" at one time, but a new disruptive innovation may be an unexpected threat.
- Mutiny. You may think your company is immune to workforce mutiny because you aren't pirates sailing the seven seas. In fact, this happens, and it's an insidious problem that could spell doom for your business.
- Major failure of product or service. If a product or service suffers a failure, your entire business could be in jeopardy.
- Transportation strikes. Do you rely on shipping for materials or to deliver products? Disruption in the transportation system could significantly hurt your reputation and bottom line.
Some of the items on this list may seem far-fetched, but all are possible events that could put your business in some sort of financial peril.
As a strategic planning partner, your company's CFO should be a key member of your team preparing for unwelcome situations which can include:
How a Business Continuity Plan Can Help Your Company Prepare for the Unknown
There are differing opinions on how many businesses fail each year, but the statistics aren't encouraging. Some have figures soaring upwards of 50 percent. The odds will not be in your favor if you fail to make financial and other contingency plans.
Insurance will often not cover all the costs associated with these events, particularly if you lose customers. One way to prepare for unexpected events and minimize their impact is by creating a business continuity plan. There are four main elements to an effective plan.
- Business Impact Analysis. Identify critical business processes or functions as well as the resources that support them. Also, make a list of the unexpected events that are most likely to impact your business.
- Business Recovery Strategies. Create your recovery strategy in case specific events take place. List your key staff and their roles in relation to the plan.
- Continuity Plan Development. Organize your business recovery teams for each potential event. Create a list of activating events that could trigger a plan such as a flood, fire, or PR disaster. Assemble a list of emergency contact phone numbers. List where key documents are stored, and how to access first aid materials.
- Plan Testing & Exercises. Train your business continuity team on each of the plans and schedule exercises to practice responses and make any necessary changes.
The Specific Role a CFO Plays in Preparing Your Business for Unexpected Events
The PNW is vulnerable to earthquakes and volcanic activity. There are also risks to businesses stemming from a volatile stock market, competition, data breaches, and global conflicts. This doesn't include threats that are industry and company-specific. Your CFO can help your business be as prepared as possible for any eventuality by spearheading and guiding your company's contingency plans.
- Develop a Continuity Plan. This was discussed above and should be a top priority.
- Draft Necessary Legal Documents. If your business is privately-owned, there should be legal documents that outline how the business will continue to operate in the event of the death or disability of a major stakeholder.
- Have an IT Plan in Place. Not only do you want to prevent data breaches, but your IT department should also have plans in place to allow the business to continue operations in the wake of any unexpected events.
- Inventory Resources. What is the state of your resources? Can you liquidate resources if necessary? Do you have a plan to reduce outflows quickly to save cash while you recover from a loss?
- Use Scenario Exercises. Consider using scenario planning to create strategic plans around a wide range of possible events that could impact your business, both short and long-term.
- Ensure Access to Cash. What are your company's current reserves? Have you established the right relationships with lenders if your cash management needs change?
- Strategies for Response. Whether it be a natural disaster, a product failure, or some other PR event, having strategies for response in place will improve the chance of a positive outcome for your business.
The days of taking a "rear-view mirror" approach to monitoring the financial welfare of a business are gone. That approach does next to nothing to help a company prevent or quickly recover from unanticipated events. The best approach is for your company's CFO to be a "co-pilot" in strategic planning, allowing the role to put the best plans and personnel in place that can either prevent or minimize unexpected events.
You may need help with preparing for unexpected events. If this is the case, please reach out to us here.
Our CFOs provide part time, interim, and project-based financial expertise to small and medium-sized businesses. In general, the work they do is focused on business and financial strategy; our CFOs know how to use the tools of accounting and finance to help business owners make the best possible decisions. Contact a team leader for a complimentary consultation to discuss your needs and business challenges.