SCENERIO ANALYSIS AND BUSINESS RISK MANAGEMENT

SCENERIO ANALYSIS AND BUSINESS RISK MANAGEMENT

Managing risk means knowing what to do in an unambiguous situation when you don’t know what to do.  That is a certain leadership quality called crisis management. Thankfully, true crises are relatively rare occurrences and this quality is under appreciated and situations are ignored until it hits.

As mentioned above, crisis is an unambiguous situation, which means not predictable and one need to strategize required moves depending on situation to tread through.

Let’s analyze some situations which have been driving global and regional growth towards south for some time now (not elaborating much as most of you would be aware). And I subscribe to the thought majority would agree that these have already affected economies and businesses globally. Adding fuel to the fire, the pandemic has accelerated the trend and leading to a possible recession.

But not to worry, we will come out of it with time. There is no challenge without the up and down tides. What else is there to do if everything is always good?

So be positive and accept challenges. Let me bring out a few geo-political factors, economics and the current pandemic to the table:

Geo-political factors: Global

The darkening situations in the world which emerged in 2019 continue to haunt in 2020. This is not limited to one country or a group of countries but evident much across the globe. I draw your attention to some of those below.

The increased threat to America’s leadership of the world (within and outside), the future of United Kingdom under the shadow of Brexit and Europe reeling under its eclipse, reducing growth from 0.9% in 2018 to 0.5% in 2019 in Latin America, political instability and protests in Central America, civil war conditions prevailing in Syria, Iraq, Lebanon and Egypt, violent protests in Hong Kong. As we progressed into 2020, the pressure by America on Iran to reduce its influence and support to its proxies in the region, assassination of one of Iran’s top generals and commander of its QODs force and several of his associates which led to fury in Iran and Iraq and the Muslim world, and many events that have put the entire world in jeopardy, including the Covid-19 pandemic allegedly generated from China and controversies around it.

Geo-Political factors: Regional

In 2019, political tensions intensified with general elections in April and May in the backdrop of victories of opposition parties in the Assembly elections in Madhya Pradesh, Rajasthan and Chhattisgarh (held in 2018 end), acrimony over allegations of Rafale deal vitiated the political atmosphere. The raised head of terror group, killing 44 CRPF men in Pulwama, air strike by India on JEM training camp in Balakot (inside Pakistan), causing unprecedented damage in the regional ties. In second half of 2019, the Government diluting Article 370 of the constitution carving out two UTs, Jammu & Kashmir and Ladakh accompanied by massive clampdown, agitations and violence following the move, initiation to move Citizenship Amendment Act, understanding/misunderstanding crept around the issue of its linking to National Register of Citizens, which provoked widespread protests.

When we see relations with neighboring countries, relations with Pakistan are frozen, the vexed Sino-Indian border dispute remaining in deep freeze, China more aggressively trying to establish its leadership across Asia. India’s trials in improving its relations in the region gained a bit with Maldives, UAE and Bangladesh but did not go well with Sri Lanka, Saudi Arabia and Iran (due to India’s tilt towards America) did not augur too well. 

Economics:

While India was in a high geo-political risk zone, its economy has been facing structural consumption and investment slowdown. After 1991 economic reforms in India reached a higher growth plateau of 7% compared to a prior rate of 3.85%. It witnessed high growth rates during 2003-04 and 2010-11 with a period average of 8.45% (GDP with base 2004-05). After an 8% growth rate in 2015-16, it started continuously falling to 6.63% in 2018-19. Despite these fluctuations, India’s average growth rate was 7.07% from 2011 to 2019. A decent figure if compared with global economies. The lower growth momentum in India could be ascribed to fluctuations in five key macro-economic variables viz. consumption, investment, savings, exports and net foreign direct investments (NFDI). The results showed that the investments declined to 29.30% of GDP in 2018-19 from 34.31% of GDP in 2011-12, caused mainly by low savings by household sector and to some extent public sector. The major cause of concern was household saving which declined from 34.27% of GDP in 2011 to 30.51% of GDP on 2018. Savings are required to meet the requirements of those who want to borrow for investments. Lower household savings imply lesser funds available in domestic market. This decline suggests higher consumption expenditure from 56.21% of GDP in 2011-12 to 59.39% of GDP in 2018-19. This means the economic growth between 2011 and 2019 was powered by consumption, not investments. In contrast, during 2003 to 2011 the growth was powered by Investments.

India’s real GDP for Q3 FY 2019-20 stood at 4.5% while growth for the fiscal year 2019-2020 was estimated at 5% and is forecast to slow down to 4.8% for the current fiscal 2020-21. Economic growth for the country could stand at 5.1% for fiscal year 2021-22, as per reports. What needs to be seen is how it pares amid the uncertainty over the Covid-19 pandemic presence.

The Pandemic:

The pandemic has spread across nearly 162 countries which have declared lockdown. India registered 11,439 confirmed cases and nearly 377 deaths as per current reports on 15 April 2020.

This is a worrisome situation for all businesses. While this is so, pharma and sanitation businesses seem to thrive from the situation, economically speaking, for India as well as other global economies. India stands in 3rd position in the world pharma production.

What to expect from business leaders (CEOs and CFOs) to manage the crisis:

Leaders always deal with ambiguity. It’s timeless and comes with the job. During crises, ambiguity becomes exponential. As fear becomes contagious across organizations, leaders must manage their own responses to ambiguity. Most companies are quickly shifting strategies as they size up COVID-19’s impacts where it hurt most: top and bottom lines. This can possibly be achieved by following our six steps of leadership:

            •           Predict what lies ahead

There’s nothing like a crisis for an accelerated learning.  Applying past lessons to unambiguous and unfamiliar situations would help tremendously. It is knowing what to do when you don’t know what to do. Hence, amid uncertainty, leaders need to be hyper-focused on past experiences and synthesize and apply them to real-time, fluid conditions. Lessons learnt from 2008 recession would be of great help.

Day to day, leaders face a multitude of issues, both urgent and important. I’ve found that many leaders have difficulty distinguishing between the two. When a crisis hits, though, everything blurs as events and their implications constantly change. What’s important often becomes urgent, and what’s urgent becomes critical. Leaders must delegate the urgent by empowering others to lead around a common purpose.

            •           Navigating and course correcting in real time

It’s not the time for companies and its leaders to hold on to 2020 original plans and budgets. They will need to re-assess near time priorities now. They should be able to do it by performing multiple scenario planning and financial modeling for potential impacts. For example, running critical verticals on break-even model for a certain time period to just sustain.

Cash flow is the second most-cited worry of management leaders. If they are already working on controlling costs they would see that exercise would come in handy. Else, it is time to start working on the same to further strengthen liquidity. Each Industry would have peculiar requirements of cash-flow and the leaders may adopt specific measures depending on the line of activity. However, the following may be applicable to all in general:

            •           Keeping existing employees paid and business alive, of course, the name of the game is to conserve cash. This can be through slicing the salaries for a defined period of time for their sustenance without affecting the livelihood. This goes along way on loyalty score card.

            •           Suspending executive bonuses for a defined period of time

            •           Halting all discretionary spending and second on third priority items

            •           Stretching out the accounts payables and focused approach to accounts receivable

            •           Revisiting investment plans in order to distinguish between important and critical. Reassess the critical ones under the given circumstances and its effect on priority business

            •           Bolster balance sheet by accessing capital. This may lead to drawing on an existing line of credit or tapping another source of liquidity.

            •           Communicate– continually

In a crisis, you first need to meet people where they are. Their most basic needs must be met and they need to feel safe. Leaders must connect with, motivate, and inspire others, and show genuine compassion. In the military, for example, leaders put the safety and well-being of others before themselves. As mentioned supra, this goes a long way in winning loyalty and talent retention.

Equally important are the investors. Communicate with investors on the priorities and measures adopted by the management in order to keep the confidence alive. The magnitude of any crisis would disturb the investor community in line with its impact, communications which bolster their confidence on the ability of the management to navigate the current period and outlook for the future performance goes a long way in sustaining any business.

Equally important is to communicate with credit lines and banks on above lines.

Transparent disclosures and reporting will also help taper off any unsolicited future enquiries from regulatory agencies.

            •           Keep ears and eyes open:

Listen to what you don’t want to hear. A potential global recession may be round the corner. There could be changes concerning the government policy and legislative response to the massive economic shock. One should also be open to assess questions such as at what point can you no longer continue. This exercise is very important for anticipating events to carryout changes to the already assessed and determined path. Hence, a constant review of strategy is important.

This is also the time to avail advantages from any policy decision by the Governments facilitating survival and growth for any or many industries.

            •           Learning from experience to apply in the future

Again, there’s nothing like a crisis or a complex problem to accelerate learning. Amid uncertainty, leaders need to be hyper-focused on past experiences and synthesize and apply them to real-time, fluid conditions. Clarity comes from finding a close comparison. By running the “unknown” of the current crisis against the “known” of previous ones, leaders gain perspective, identify patterns, connect the dots, and determine appropriate and timely responses. The eventual recovery may be a V or a U or some other alphabet letter, but there will be a new normal for sure.

            •           Lead to improve yourself and others

The natural inclination in a crisis may be to go into command-and-control mode. That’s not leadership. Leadership is creating a “bottom-up” culture of world-class observers to accurately perceive today in order to predict tomorrow. In a crisis, leaders must connect with, motivate, and inspire others, and show genuine compassion. In the military, for example, leaders put the safety and well-being of others before themselves. I’ve not met any military leaders but read at many a time that during periods of conflict they hold on to a virtue and say, “I’ve never lost a soldier.” This reveals a deep mindset of humility and accountability.

Global economic experts, majority are of the view that the recovery would be a “V” curve, while some predict it a “U” curve. The ‘V” curve means most of the industries could bounce back to near normalcy in activity (while carrying the economic backlog impact of lockdown) in 3rd and 4th quarter of FY 2021, the “U” curve is expected to take time till 2nd or 3rd quarter of FY2021 to revive. This is so because the pandemic has created a cease in activity but there is no damage to infrastructure, facilities, working conditions, transportation. The rebound in case of major catastrophes like earth quakes, hurricanes etc. takes longer time.

In these times of strife, positive mindset and the spirit of fight are important. Good luck.

CA. Govardhan Chawla (Senior Finance Professional & Associate, Bizlinkz CFO Services )