Explanation / Introduction
This article on crisis management is part 1 of a series of articles designed to help you maneuver your business more safely through a crisis. Of course, the individual articles do not claim to be exhaustive and they are of course not sufficient on their own to make far-reaching decisions based on them. The articles should support you to find a suitable strategy for your own business.
This series of articles is intended for you if you are either the managing director of your own corporation (GmbH, UG, etc.) or have a sole proprietorship. It is not suitable if you are the owner of a company in which you have hired an external manager.
This is a “living series”, so if we find that changes make the article more understandable, we’ll revise it, so it’s worth checking back more often.
Part 1: Assessing the crisis correctly
In order for you to properly navigate crisis management, you need a solid assessment of what you are up against.
Since many small businesses and self-employed people are currently in trouble due to the Corona crisis, we present you here suitable assessments, so that you have it easier to come to a result as quickly as possible.
Is the crisis internal or external?
Internal = The crisis was caused by the own company.
External = An external factor triggered the crisis.
In terms of the current crisis: it is an external factor.
Is that local or global?
Local = The crisis affects one’s own company, the narrower geographical area or part of the industry.
Global = The crisis is national or international in scope.
Related to the current crisis: The crisis is global.
How severe is crisis in relation to your business?
To better assess how hard the crisis is hitting you, it helps to use numbers as an objective yardstick.
In order to correctly assess the severity in relation to your company, it helps to compare the two crisis years (2020 and 2021) with a normal year at your company.
How much do you estimate your loss (i.e. real minus) will be in these two years in total for you or your company.
Let’s make an example of this:
The loss in 2020 and 2021 amounts to a total of 120,000 euros.
Now see what your normal profit or earnings are per year. In the case of a sole proprietorship, you can simply use your withdrawal; in the case of a corporation that you manage yourself, you can use your managing director’s salary plus the profit according to the annual financial statements.
Let’s assume a profit of 40,000 euros.
As a result, the crisis is equal to your earnings of 3 years. What number comes out here is not important for now. However, in most cases it helps you to first see how dramatic it really is. Here we are talking about the value you have earned over several years, yet this value is quite manageable when viewed over your entire life.
Probably between 5% and 15% of your working life. I’m sure it’ll be exhausting, but it’s catchable. In addition, we will need the figure later when it comes to finding appropriate measures.
Motto: "when in doubt, zoom out"
When you take a bird’s eye view, it often helps you make clearer and better decisions
Crisis management - Are you self-employed or an entrepreneur?
Self-employed means the essence of what you sell is your time, as an entrepreneur you arrange many outside resources (capital, employees, machinery, raw materials, etc.) and sell the result of it all.
Examples of self-sufficient:
- Web designer
- Tax consultant
- General consultant
- 1-person service provider
Examples of entrepreneurs:
- Construction company
- SaaS Business
Again, neither is universally good or bad. Only the recipe for crisis management differs significantly.
Simplified you can say, as a self-employed person you are much more flexible and have low fixed costs. As an entrepreneur, you have more control and more clout.
Have you been banned or severely restricted from doing 100% of your job?
- Activity fully permitted, but customers do not currently buy
- Activity restricted
- activity prohibited
Calculate your monthly losses
For most small businesses, crisis means they are already losing money. Therefore, determine how much money you are currently losing per month. What counts here is not the lost profit, but how much money is actually there each month less than before.
For our example, this is a simplified loss of 5000 Euros per month (120,000 Euros : 24 months = 5000 Euros).
Determine your liquid assets
Now check how much liquid cash you have left? This includes, for example, account balances, shares, etc. Everything that is already available in monetary form or that you can immediately turn into money.
Let us assume here an amount of 25,000 euros.
Determine your survival time
How many months can you keep the current state? Divide your liquid assets by your monthly losses.
Result here: 5 months (25.000.- Euro : 5.000.- Euro)
Status and regular update
If you have processed the questions for your company up to this point, you will initially have a current status. It is best to update this status regularly according to the following pattern. This is because liquidity usually changes in the course of the month, perhaps all annual postings are debited in one month, you have sold a special item or a one-off service, or aid has actually flowed.
< 2 months
From 4 months
every 7 days
every 14 days
1x per month
Now that you have a current overview of where you stand, the next step is action planning. Which measures you should choose basically depends on your business, the survival period and the severity of the crisis.
First, a rule of thumb for guidance:
If your survival time is less than 2 months, the full concentration should be on your liquidity.
If the survival period is 2-4 months, it is recommended to put the main focus on liquidity and start planning for the future.
From a survival period of 4 months you can focus on strategy and action planning, but you should always keep an eye on your liquidity.