It’s no secret the COVID-19 pandemic has had a substantial negative impact on businesses. Companies deemed non-essential have closed their doors, employees have been furloughed or laid off, supply chains have been disrupted, and consumer demand is down.
In these trying times, a quote by John F. Kennedy can help remind us of the opportunities that also exist:
“The Chinese use two brush strokes to write the word ‘crisis’. One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger, but recognize the opportunity.”
Many business owners are responding to the danger this crisis has created by managing expenses, identifying sources of cash, postponing investments, dipping into reserves, and communicating regularly with family and shareholders. Times are tough, but the current circumstances have also provided opportunities for leaders to reset for the long-term health and sustainability of the business.
The following are key areas to review at this time of opportunity:
The COVID-19 crisis has brought about rapid change in business operations and consumer preferences. Employees are largely working from home, consumers are picking up dinner curbside, students are learning online, doctors are prescribing treatment through videoconferences, and fitness classes are being held remotely. Will these trends continue? If so, is your business positioned to succeed in this new environment? Can the company meet the change in consumer preferences?
During times of change, a clear business strategy is needed to set priorities and guide decision making. The business’ strengths, weaknesses, threats, and opportunities identified in the last strategic planning process may now be significantly different. Going through this planning process provides an opportunity to assess what is happening inside and outside the company and identify where change needs to be made. The strategic plan should detail the company’s present situation, outline a program for the future, and provide a process to get there.
We can learn a lot about ourselves, family members, and management during times of crisis. Take this opportunity to document the reactions you observe from those involved in the business. What are their concerns? Are there consistent values shared amongst family members? What risk tolerance do owners have?
Business leaders should continually prepare for a crisis. Without a plan and governance structure already in place, owners may have found themselves particularly vulnerable during this crisis. It’s possible they’ve made reactive decisions that will not benefit the business over the long-term or have unintentionally caused family conflict. To mitigate these issues, consider establishing a board of directors that can assist management in reviewing strategy, risk management, and emerging issues. The board can act as a resource when discussing “what could go wrong” scenarios and help develop business responses to those potential events. What business risks have you identified during this crisis? And what should be established now to alleviate those risks going forward?
A documented decision-making process that includes management and family members is another valuable governance tool. The tool provides transparency in the decision process, creates consistency, reduces the time to make decisions, and provides clarity on roles. One of the benefits of a documented process is that it can help avoid snap decisions, since it requires gathering sufficient information and supports logical thinking and thoughtful consideration. Another benefit is that the documented process will clarify who the decision makers are and what needs to be communicated to specific stakeholders.
Read my article Peace, Love, and Family Harmony: Safeguarding the Long-Term Interest of Your Family Business for more thoughts on this subject.
In order to support the legacy of the family business for generations to come, management must take steps to position their companies for financial resiliency during times of crisis, while also being a steward to the long-term financial health of the company. The current crisis required a quick response by business leaders to assess cash flow and liquidity concerns. Operating expenses had to be reduced as revenues declined. Budgets and cash flow forecasts had to be revised. Some business owners had to look for alternative means to raise cash to fund operations. In an economic crunch, companies must make these types of moves to ensure that enough cash is on hand to meet current obligations.
Reductions to shareholder distributions may also be necessary; making for some difficult conversations with family members who rely on them. It may be time to consider documenting a distribution policy that specifies how cash flow available for distributions is calculated and situations when distributions may not be justified. The policy should balance the needs of both the business and the family shareholders. Hopefully, management has learned a lot about the financial needs of the business during this crisis and how quickly the business can respond. This knowledge can be applied when determining an adequate cash reserve and how maintaining one may affect the terms of the distribution policy.
As family businesses move toward recovery, the lessons learned provide opportunities for families and their businesses to recommit to their values, reset their business strategies, develop governance policies, and establish strong balance sheets.
What have you learned during your observations of this current crisis that, if addressed now, can set your business up for success in the future? What opportunities have you recognized?
If you have further questions about this article or your family business, please contact me.
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