Business Survival: Romancing the Risk

The key to withstand the test of time in a conflict zone is to keep your business extremely lean, liquid and diversified, so that it remains well prepared for these predictably unpredictable cycles of the turbulence with much more resilience, grit and stability.
Business Survival: Romancing the Risk
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Around the globe, places like Dubai, Toronto and New York with stable and peaceful environments offer wide opportunities for businesses, trade and commerce. Predictability in government policies, political stability, tax rules, interest rates and other regulations provide an unfaltering canvas for businesses to devise long term business strategies with fair amount of precision. Any negative change or disruption in these macro environmental variables can make all the assumptions of a well-crafted business strategy absolutely irrelevant, which eventually culminates into shrinking margins, losses and sometimes even closure of any entire industry.

The understanding of this framework can help us in establishing a broad immunity shell for the survival of businesses operating in highly unpredictable, intensely volatile and absolutely uncertain place of ours. Given the fact that the systemic risk to which our businesses are exposed are colossal, it is therefore essential to adopt strategies that will help us in mitigating the unexpected losses. Since 1989, after the armed resistance broke out, businesses in the state have been in a state of continuous quagmire. Frequent political unrest, winter vagaries and the latest threat in terms of flood alarms establishes the fact that these macro environmental threats are not only real but importantly cyclical in nature. Surviving in such a turbulent environment therefore becomes a challenge and adopting some time tested strategies and business survival tactics can help a business in outliving these turbulences.

Counter-cyclical buffer: The concept of counter-cyclical buffer is based on the principle that the quantum of savings during times of high economic activity should be increased and kept as a buffer for rainy days. The simple example is demonstrated by the habit developed by housewives in valley who hoard stock of food supplies during sunny days. Based on the experiences of food shortage faced during harsh winters, the culture of hoarding food is passed on from one generation to another. Due to turmoil the habit of hoarding food stocks and essentials got further strengthened and is precisely the reason why we have been able to survive month's long curfews and floods with little hardships.

The same principle if applied to businesses can help in keeping them afloat during times of economic distress. Small investments in liquid assets like fixed deposits, mutual funds, equities or bullion during normal cash inflows can help in creating a buffer which can be used during rainy days. Although the concept of savings does not exist for businesses as they are always short of funds and mostly rely on bank credit for meeting their working capital and other needs. Diverting funds towards savings and paying more interest on bank credit doesn't seem like a logical option, however, survival during tough times comes at a cost and we must remember that we are not living in a normal business environment. To survive this abnormality, there has to be an abnormal financial planning as well.  

Debt-equity ratio: I have already written a complete piece on financing businesses through equity rather than debt. The inherent risk bearing capacity in equity makes it an ideal choice for businesses operating in a conflict zone. For a Rs 20 Lakh requirement in a business in a conflict zone like ours, I would say it's far better to make as many as 20 investing partners with Rs1 Lakh each and sharing profits/losses with them, rather than relying on a Rs 20 Lakh bank loan. When due to unavoidable systemic risks your cash flows seize to come, the recurring interest costs coupled with compounding keeps on mounting.

This results in killing your business faster than anything else. Debt should ideally form a very small percentage of one's business finances and that too when it's about business expansion. Starting a fresh business on debt in a conflict zone is absolutely suicidal.

Leased vs. owned: One of the other recurring costs for business owners is the monthly rentals of the shop/office/factory from which it operates. In normal business environments this costs is just one of the entries under operational expenses head, however, servicing this cash outflow becomes a daunting task for businesses during shutdowns and other unavoidable circumstances. I have observed that businesses with owned spaces have a lesser probability to fail compared to the ones, which operate from rented commercial spaces. Although majority of businesses do operate from rented spaces but for survival sake if your finances allow you and if it's possible to sacrifice in other factors of production I would suggest owning a place rather than leasing. It will only improve your chances of surviving the tide.

Recurring operational overheads (hire vs outsource): Business requires many services depending on its nature. Services like accounting, legal services, graphic designing and human resources like manager, sales man, receptionist, driver, office boy etc are needed for smooth operations. During normal conditions hiring people and services fulltime makes sense as it is not only cheap but it also expedites business operations effectively. However, during downtime, the same value adding assets start piling in the form of liabilities. With no contribution from these factors of production, the ability to feed them becomes a challenge which at times even ends up the owner getting buried under a pile of debt. It is therefore always advisable for businesses in conflict zone to outsource or hire order-to-order services for as many processes as possible in order to remain lean.   

Diversifying markets and establishments: Businesses have two serious dependences. One, the supply side of raw material, human resource and expertise and, two, the markets that it serves. Diversified operations help in continuing the operations during times of unrest and turmoil. Besides keeping a working office at different locations it is highly advisable to start exploring markets from other geographies so that even when the local markets are offering no sales, there is at least something (even if the sales are small), that will keep the cash registers ringing. It can be a costly affair to explore new geographies for small businesses, but, people under same industry can club together and crowd fund for financing diversification which will surely help them survive crises in the long run.

In addition to the above major business decisions there are a number of small tactics which can decide between death and survival of a business. Decisions like keeping an optimum inventory level which does not expose a business to an unavoidable carrying cost during turmoil or establishing fixed land line telephone connectivity to mitigate the risk of losing connectivity with debtors, suppliers and customers during mobile connectivity clampdown can make a lot of difference.

The key to withstand the test of time in a conflict zone is to keep your business extremely lean, liquid and diversified, so that it remains well prepared for these predictably unpredictable cycles of the turbulence with much more resilience, grit and stability.

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