How to navigate through a financial or economic crisis

The last two years, we have experienced our fair share of crises: COVID-19, inflation, the war in Ukraine leading to the energy crisis, which led to further inflation,… On top of that, financial crises have occurred on more local levels. Within companies, some regions, sectors,… Companies have been disrupted, competition has moved in and suddenly revenue has decreased. Every business is prone to the potential of a crisis and entrepreneurs have had to deal with them mostly at the same time.

For entrepreneurs (from freelancers to small and medium sized business and even large corporates) it hasn’t been the easiest to grow and build their business. For a lot of those it hasn’t even been easy to stay afloat. Just as things got better, the next thing hit them.

There are some simple ways to navigate a crisis though. I'm sharing a couple of the best working practices with you. I know this because I've been through a crisis myself. I had to act quickly and decisively, but I made it through. On top of that, as part of my work, I've helped other entrepreneurs, businesses, and companies to deal with crises. Entrepreneurs are the most resilient kind that I know (and I'm not just saying that because I'm one of them). When a lot of people have already given up, we keep fighting and going. We push beyond the barriers, no matter what life throws at us. If you are experiencing a crisis, from difficulties in growth to difficulties in staying afloat, I hope this will help you to weather the storm.

These are the main practices that I found work best:

  1. Know your economics
  2. Know your finances
  3. Work with scenarios
  4. Move first
  5. Leverage technology
  6. Productise what you can
  7. Take everyone on board
  8. Leverage the crisis

Know your economics

Most entrepreneurs don't have a background in finance or economics. If they have any knowledge at all, it is usually just basic bookkeeping and business concepts as part of their education. That's a pity, because a business is heavily influenced by the abstract concept of economics. If things go bad, they will be impacted, whether they want it or not, even if nothing has changed for them. Supply chains are usually the first place where they will feel it. Raw materials, logistics, and prices will increase. This means they will have to increase their prices, which will lead to unhappy clients at first, and a decrease in their client base in the long term.

Therefore, it is important to know your economics. The basics are enough to understand what is happening around you and how it may potentially impact you, so that you can stay ahead of everyone else.

I can definitely recommend reading the Personal MBA, written by Josh Kauffman. It explains a lot of basic concepts in plain language, so you can quickly get up to speed.

Know your finances

In addition to knowing your economics (the overall concepts that influence markets, supply, and demand), you also need to know your finances (how your individual business generates money and bears the costs for doing so, leading to your profits, i.e. what makes you grow). Economics can be beneficial, but if your finances are unhealthy (e.g. because you spend considerably more than you bring in money) you will fail. The opposite applies as well: companies that are financially healthy are better equipped to deal with anything the world throws at them.

Learn the basic financial concepts such as your P&L (Profit and Loss), balance sheet, what constitutes your top and bottom line numbers, investments, debt, taxes,…

If you do not have an accountant, hire one. Ensure that you have a competent one. Someone who can explain things to you in a clear and honest manner, and who can be trusted to handle any financial matters, both personal and professional.

I can definitely recommend the Personal MBA here as well. It deals with both economical as financial topics.

Once you have done that, start looking at your finances and learn what is good and what is bad, what can be improved and where you perform well. If you take ownership of your finances, you will know how well or poorly you are doing. This allows you to make better decisions that benefit you and your business, especially if others depend on you for their livelihood.

Work with scenarios

When working with clients on a plan to weather through a financial or economic storm, I ask them to understand the above two concepts first. The reason is because they are so important for what comes next.

After understanding your economics and finances, it's time to create scenarios. Why? Because things always look worse than they actually are and no one knows how it will play out. You want to avoid taking drastic decisions that are not necessary. That's where scenarios come in.

Create three scenarios:

  1. A neutral scenario: Your context is not going to change, the direction will remain the same (which isn’t static but dynamic, e.g. “expectation is that inflation will increase by 5 basis points in the next 6 months”). You also assume that the impact of this will be similar to others and you are not impacted less or worse than other businesses.
  2. A worst case scenario: Your context is only going to get worse. Similarly, you assume that the impact on your business will be worse than other businesses. Things will definitely not improve. If things don’t change, it will end in financial misery for you, your business and those that work with you.
  3. A best case scenario: Your context is going to improve. Similarly, you assume that your business will be impacted less compared to other businesses. In other words, you will see a positive scenario.

Now, map these out. This is where the economic and financial knowledge comes in. Define for each scenario what that means from an economic context (how does it look like when the economic context is going to get worse, stays neutral, or will get better) and a financial context (how does it look like when your financial situation is going to get worse, stays neutral, or will improve). Work on them separately because they can each play out independently (e.g. even in a good or recovering economic environment, other conditions may lead to an impact on your business and therefore make your business lose revenue).

Try to come up with a couple (but not too many) criteria or indicators. It's also possible to use ranges. This makes your scenarios more practical to work with. If you have multiple criteria and indicators, you can also add more importance to them, define critical criteria (if one of these is met, the scenario kicks in) or define rules (if these criteria are met, only then the scenario starts, not if only one criterion is met). Try to keep it simple though and don't add too many rules and bypasses.

You have only done half of the work. Knowing the criteria for when each scenario will play out, now you need to define actions. What will you do when you end up in a worst case, neutral case, or best case scenario? Again, go through each scenario and try to define multiple actions that you will take to get back on track. Do not only rely on one action; the golden remedy does not exist here.

Finally, keep them up to date. Things can turn around quickly. Make sure you can follow and you can take action when the direction changes.

Move first

The goal of creating these scenarios is that it provides you with a set of leading indicators. Leading indicators provide you with signals on what is to come (opposite to lagging indicators, which provide information on performance and past events). This will allow you to move first and not wait until a scenario actually plays out.

Let's say that one of the economic indicators for your situation would be an increase of 5 basis points in the price of a raw material which is crucial to your production. If that scenario plays out, it means you will have to increase your prices beyond the point that your clients want to buy your product, resulting in a significant loss in sales and revenue. This means you will have to cut costs and probably let people go. Knowing this will allow you to take action the moment you are approaching an increase of 3 or 4 basis points. This allows you to prepare and take action well before you hit the 5 basis points. If you wait until it hits the 5 basis points, you're already too late.

Remember, always move first. Keep an eye on your scenarios and take action.

Leverage technology

One of the easiest ways to reduce the impact of a financial or economic crisis is to find efficiencies. Efficiencies allow you to run cheaper, saving on costs and running at a higher profit margin, in theory. However, technology is no longer an efficiency gain for your company; it is becoming more and more a competitive advantage. Try to figure out how you can leverage technology to gain a competitive advantage or to make your products or services better, rather than using it to lower your cost base. It could even lead to the launch of new products or services.

Productise what you can

Services companies rely on a simple equation to generate revenue: hours effectively sold multiplied by hourly price equals revenue. A services-based company tries to maximise the output it can produce in one hour and minimise the hours that are not effectively sold (often referred to as bench time). However, and here's the catch, the growth path of a services company is not just linear. Usually, they cannot just add one hour if they are one hour short. They will have to hire someone who will have to be paid for a block of hours (typically the 8-hour workday). This means adding hours is done in blocks. This is a difficult model to scale, and one with a high impact when demand falls back.

An alternative for service companies to add additional revenue streams (some made it even their main activity) is to create productised services or to productise their services.

A productised service packages the services that you offer with a predefined scope and outcome. The deliverables are clear and the approach as well. A productised service is still run by people, mostly, but it reduces the risk of selling your traditional services model. It makes planning and revenue much more predictable. On top of that, if done well, it increases your margins a lot. But it doesn't entirely solve your scalability issues or the increase in bench time once demand slows down.

Productising your service is another way to generate additional revenue streams and to further de-risk your business model. It turns your service into a product and you make it mostly self-serving for customers. You can do this by identifying those services that you offer most to customers, where you have built up a lot of expertise and which actually doesn't require you to put that much effort into it. You then figure out the right product package and sell this to customers directly.

Try to figure out from your services package where you could turn your customised services into something more standardised, or even further repackaging it as a product. Additional benefit: the higher margins allow you to compete in a difficult environment with much more confidence.

Take everyone on board

Going through a crisis is not something you do alone. There will be ups and downs, but also an impact on others: your own family and friends, as well as employees, investors, board members, clients, suppliers, and more. Therefore, it is important to take everyone on board. Be transparent about the decisions you make (or are about to make) and the potential impact. Be a clear communicator. And be empathetic towards others' situations. Sometimes you have to bring bad news, but you can do so warmly as well.

Remember to treat everyone with respect, because you will need them along the way to get out of the crisis and afterwards when you start to grow again as well.

If you have a coach or mentor, it is a very good practice to work closely with them. If you do not have a coach or mentor, try to find one. This will improve your decision-making and help you to deal with the emotional baggage of making difficult decisions.

If you have a board of directors or investors, be proactive. A golden rule is that you want to provide them with information and decisions before they start asking questions about a topic. Especially in times of crisis, they will likely be more involved sooner rather than later. Most of them are in business themselves, so they will be dealing with the same issues. This could also give you an advantage in terms of expertise.

Similarly, make sure you own the relationship with external people: your banker, key suppliers, and your clients. You'll need these to successfully manage your way back to growth. Come up with simple strategies, backed by solid data (especially with your banker, so knowing your economics and finances will greatly help and assure them) and achievable plans. Especially the latter. If a plan is unachievable, it won't fly. If a strategy is complex, they won't follow you. And without data, it's not more than an idea.

Leverage the crisis

A crisis can also offer opportunities. Some of them are short-term (remember the many hygiene and sanitisation products that launched in the wake of COVID-19 measures) but also long-term (the shift to e-commerce and online business following restrictions during the COVID-19 pandemic).

Any crisis offers opportunities. I'm a fan of more longer-term opportunities, because you'll have a higher likelihood of sustainable growth. Short-term opportunities always carry the risk of high costs and depreciations after the dust settles.

See what expertise you have that you can leverage to seize opportunities that the crisis brings. Sometimes it can even mean reinventing yourself, or even adding entire new businesses.

The winners are those who see an opportunity where others only see challenges. I don't know if anyone else said that before, but I take it as a mantra.

I hope you found the above tips and insights helpful and inspiring. Remember, you are not alone in your journey and there is always a way to get back on track when you are going through an economic and financial crisis (lesson 1: Everything which goes up, goes down, and back up again). I invite you to share your own experiences, tips, and tools. Together, we can support each other and come out stronger on the other side.