All companies must face, before or after, really conflictive and traumatic financial situations. Some manage to overcome them: they are the "winners".
Others succumb irretrievably: they are the “losers”.
But, all the studies coincide in pointing out that the organizations that have been able to successfully overcome their periods of crisis are those that have acted decisively in the face of their first symptoms. What are those symptoms?
Summary:
The possibility of a financial crisis is an integral part of the business itself.
Crisis situations can be divided into four levels of increasing danger: potential crisis, crisis in gestation, crisis in development and total crisis.
The companies that have completely overcome their periods of crisis have been those that have acted when they were in the first two levels.
The key characteristic and origin of the potential crisis is that important changes are taking place in the environment and the company continues to cling to its traditional values and approaches and to the way “things have always been done here”.
At the crisis level in gestation, the company begins to show the first typical symptoms of a crisis situation: the basic indicators of business activity begin to show clear symptoms of weakness and deterioration.
Studies indicate that most of the companies that were able to successfully overcome their crises did so because they acted while they were at the moment of initiating the level of crisis in gestation.
How can you determine what level of crisis your company is in?
The possibility of a financial crisis is part of the very nature of all companies, small, medium, large, multinational or global. The bankruptcy statistics of any country confirm this. ("The five deadly sins of SMEs"). The repeated scandals of gigantic companies, listed on the most important stock exchanges in the world, also reaffirm it: just read the newspapers or listen to the television news. No company is exempt from that fateful risk. Even, as is known, a period of rapid growth of the company can turn into a crisis situation.
The four levels of the crisis
Many authors, analysts and researchers of business reality have carefully studied hundreds of cases of companies in crisis. Among them we can point out Zimmerman, Wilson, Argenti, Hambrick, Lorange, Deal and Kennedy, who, together, have analyzed the crisis processes of more than 1,200 companies in the US, Europe, Latin America and Japan. One of the first conclusions of these analysts is that crisis situations can be divided into four levels of increasing danger:
Level 1: Potential crisis.
Level 2: Crisis in gestation.
Level 3: Crisis in progress.
Level 4: Total crisis.
Another conclusion is that the companies that have managed to overcome and fully recover from their periods of crisis have been those that have acted, firmly and correctly, while they were in the first two levels. Those that have delayed the adoption of corrective measures have subsequently been penalized by the magnitude of the actions to be implemented to straighten the course or by the uselessness of any initiative in view of the degree of structural deterioration achieved.
Consequently, in this article we are going to focus on the first two levels of crisis, pointing out the symptoms of each one of them, in such a way as to form a kind of thermometer, barometer or set of warning signs, allowing the levels of corporate responsibility become aware of the situation that they may face in the short term, analyze more thoroughly (objectively and honestly) the problem and adopt the pertinent measures with enough time.
Potential crisis
The situation of potential crisis is one of the most delicate since it occurs in companies in which an apparently solid and healthy financial situation induces its managers to self-complacency and neglect the analysis of the organization, which prevents them from determining in which areas must the company change in order to adapt effectively to the transformations that are taking place in the environment.
The situation of potential crisis is generated when, despite the fact that important changes are taking place in the environment, the company continues to cling to its traditional values and approaches and to the way "things have always been done here". The main symptoms of a potential crisis situation are as follows:
The company has shown for years a positive, but mediocre behavior, without great progress or growth.
The company, by contrast, has grown very rapidly in recent years, but has not adjusted its structures, systems and management style to its new dimensions.
Senior managers have progressively drifted away from consumers, users or customers because they "are too busy running the business" or consider themselves "too important to spend their time on those things."
In the company, the levels of internal communication are very low, poor and bureaucratic.
There are funding problems in all or some of the following areas: lack of leadership or very weak leadership, inappropriate behaviors, low work morale, poor or non-existent formal methods for setting objectives and goals, poor feedback systems, very low level of self-criticism and / or acceptance of it.
Excessive bureaucracy that is reflected in areas such as: excessive hierarchical levels, poorly fluid internal relations, excessively rigid discipline, excess rules and regulations, and the like.
Communication with providers has become too complex and time consuming.
Consumers, users or clients begin to perceive that nobody in the company really cares about them: little or no attention is paid to complaints, processes that are too complicated to acquire or use products and services, low product quality or services, and the like.
Management focuses exclusively on accounting and quantifiable data (in many cases, the financial area is the one that holds the true power).
The company culture is so unadaptable that it does not allow any internal change or transformation.
When the environment does not change very quickly, it is possible for a company to continue operating without major problems dragging an internal situation of potential crisis. But, when the environment changes very quickly, as is the case in the times in which we live, the organization can go, also extremely quickly, from the level of potential crisis to the level of crisis in gestation.
Crisis in gestation
At this level, also called “pre-crisis”, the company begins to show the first typical symptoms of a crisis situation. The basic indicators of business activity are beginning to show clear symptoms of weakness and deterioration. The main warning signs are, among others:
Liquidity problems: moderate cash deficit, loss of working capital or working capital (treasury).
Problems in the area of collections: increase in unpaid bills, sales made knowingly that they will be of doubtful recovery.
Problems with profitability: profitability levels begin to drop noticeably, profitability turns into moderate losses that are considered “acceptable”, the fall in profitability affects all areas of the company.
Market problems: stagnant or declining sales, loss of market share, weak market image, and the like.
Problems with quality: excess of claims and complaints, inability to meet the expectations of important customers, deterioration of the prestige of the company, increased returns, etc.
Problems with staff: work morale worsens, inability to hire quality staff, high turnover and absenteeism, decreased levels of productivity, and the like.
Problems with the organization of the company: confusion and frequent conflicts, lack of definition in the assignment of responsibilities, poor internal communication.
Management problems: excessive centralization of decisions, absence of precise objectives and goals in key areas.
Adjustment problems with the environment: the company continues to operate with the same methods and systems despite the fact that its managers are aware of the changes that are taking place in the environment ("there is no worse blind person than the one who does not want to see").
Problems with planning and forecasting: command levels don't know how to predict what's going to happen in the near-term environment.
Problems in the area of innovation: the company refuses to innovate or improve its products, services, systems, management approaches, etc.
If your company is currently showing several of these symptoms, you should start to worry: Studies indicate that most companies that were able to successfully overcome their crises did so because they acted while they were at the time of start the level of crisis in gestation. But, the studies also affirm that if the appropriate corrective measures are not taken at this level, the company can fall very quickly and easily to the level of crisis in development, exponentially complicating its already dubious recovery.
