HOW TO LEAD A COMPANY FROM THE FINANCIAL CRISIS
The reasons for the financial crisis in an enterprise can be both a general market downturn, an incorrectly chosen development strategy, and inefficient management work. Regardless, universal tools can be used to take a company out of a crisis: cost reduction, sales promotion, cash flow optimization, work with debtors, and payables restructuring.
Diagnosing Financial Crisis
The speed and methods of overcoming the crisis largely depend on what causes it and how quickly it will be revealed. In the process of developing the financial crisis, four main stages can be distinguished:
reducing the efficiency of capital use, reducing profitability and absolute values of profit volumes;
the occurrence of unprofitable production; lack of own funds and reserve funds, a sharp decline in the company’s solvency. Often this is accompanied by a significant reduction in production due to the fact that part of the working capital is used to service the increased accounts payable;
state of acute insolvency. The company does not have the ability to finance production and make payments on previous obligations. There is a real threat of suspension or even a complete cessation of production, and then bankruptcy.
Vyacheslav Gvozdev, Deputy Chief Financial Officer at Nikpa (Moscow) In our company, the main criterion for the upcoming financial crisis is the dynamic growth of overdue payables, as well as the frequent excess of limits on the shipment of goods to customers and non-compliance with their due dates. Another indicator, which is constantly monitored after the crisis situation in which our company was two and a half years ago, is the balance of inventory and their dynamics. During the crisis, we were faced with the fact that with a significant amount of funds immobilized in stockpiles, the implementation practically stopped, because the goods in the warehouse were either not the same or of unsatisfactory quality in terms of consumer demand.
Grigory Dorokhin, Head of the Planning and Budget Department of OJSC Stroydormash Plant (Yekaterinburg)
In most cases, a crisis is a consequence of poor management in the absence of a development strategy. The main reason for which enterprises are on the verge of financial collapse is work per client. A weakly diversified client portfolio leads to negative consequences. The company ceases to be flexible, losing control mechanisms such as pricing and receivables management, since it has to adjust to its requirements in order to keep the client.
Another common reason for the development of the crisis is the lack of effective management of the financial and economic unit based on modern mechanisms such as budgeting, margin analysis, and credit policies. In addition to economic reasons, it is necessary to note the existing legal risks that may adversely affect the financial condition of the company.
With proper management, the main reason for the development of the crisis in the company is the general decline in the market. Sustained stagnation of the company, lasting more than a year, is an obvious indicator of the crisis. Such
phenomena can be easily distinguished from seasonal fluctuations, which rarely last longer than two or three months.
A way out of the crisis is possible only by eliminating the causes of its occurrence. To do this, it is necessary to conduct a thorough and comprehensive analysis of the external and internal environment, highlight those components that really have priority for the company (stocks, equipment, key personnel), collect information on each component, and assess the real situation of the enterprise. Comprehensive diagnosis of possible causes of the development of a crisis in an enterprise includes:
analysis of the effectiveness of the current strategy and its functional areas (strategy in the field of financial management, sales and production). For this, monitoring of changes in key performance indicators of the company in functional areas is carried out;
analysis of the competitive advantages of the company, its strengths and weaknesses, as well as opportunities and threats (SWOT-analysis);
analysis of the competitiveness of prices and costs of the enterprise. For this purpose, periodic marketing research and operational monitoring of competitors are conducted.
Due to their labor intensity, most of the listed procedures, with the exception of monitoring key performance indicators, cannot be carried out on a monthly basis. It may be recommended to perform diagnostics annually or in cases when the external and internal conditions of the enterprise change significantly.
Anna Nekhina, Director of the Anti-Crisis Research Laboratory (Moscow) The reasons for the crisis can be both a general market downturn and an incorrectly chosen enterprise development strategy.