Crisis management is the process used by organizations to respond to disruptive and unexpected situations – black swan events if you will.
In crisis management theory, they are typically three elements that make something a crisis:
- A meaningful threat to the organization
- From an unexpected event
- That must be responded to quickly
The coronavirus presents a pretty good example of something that meets all those criteria. It presents a significant threat to many businesses, was broadly unexpected and responses must be quick.
I have spent much of the last month on the phone talking with business owners and thinking about how best to respond to this crisis and crises in general.
I am attempting to compile the best information I have been able to find through those conversations and my own research to share.
One thing I will not be doing is attempting to predict macroeconomic events, the course of the virus, or policy responses.
There is no doubt that all of these factors are important in any crisis. If we knew them, we could make much better decisions.
However, there is equally little doubt that knowing them is effectively impossible. The possible range of outcomes is enormous for these types of complex systems make it extremely difficult for anyone to predict.
I will subscribe to the approach espoused by former British Prime Minister Benjamin Disraeli: “I am prepared for the worst, but hope for the best.”
My network and clients are primarily internet-based startups and small businesses (E.g. SaaS, eCommerce, services, media) with less than 25 employees. While I’ve tried to make this generally applicable, it is based on my experience and conversations with that segment.
Peace Time vs. War Time CEOs
A16z co-founder Ben Horowitz offers a useful dichotomy to think about crisis management: Peacetime CEO vs. Wartime CEO.
Most of the time, most companies are in peacetime. In times of peace, companies can focus on expanding the market and reinforcing the company’s strengths.
In wartime, a company is fending off an imminent and existential threat. This can come from competition as with Intel under Andy Grove in the 1980s. In the mid-1980s, there was an unstoppable threat from Japanese semiconductor companies that could have bankrupted Intel. The only way to survive was for Grove to move Intel out of the memory business which employed 80% of its staff.
It can also come from dramatic macroeconomic change as we are witnessing with COVID-19. Unemployment claims are the highest they have been in history.
The shock to both supply and demand sides of the economy are unparalleled in both their severity and speed. The supply shock happens because many people need to be able to go into a physical location to be productive – factory workers and waiters can’t work remotely. The demand shock happens because people need to go out of their homes in order to buy a lot of stuff and they aren’t doing that right now.
Of course, every company’s situation is different. What I can say is that having spoken with many CEOs that weathered both the global financial crisis and dotcom bubble across many different situations, I can say that the biggest piece of advice boils down to making fast and seemingly aggressive adjustments to changing circumstances.
A Peacetime CEO has time to think and process and let people with diverse viewpoints offer feedback. A Wartime CEO often does not have that luxury.
Delaying making hard decisions today is likely to lead to much harder decisions with worse choices in the future.
With that in mind, I’m going to lay out a crisis management plan with options to think through.
Protect Your Employees and Customers
First and foremost, of course, is the health and wellbeing of your team and customers.
Though it should go without saying at this point, anyone who can work from home should do so. Anyone who cannot work from home will need to be dealt with individually. I’ll go into this more in the final section.
Transparency is also super important. Everyone is scared now and being upfront and letting people know about what is going on in the business at least remove one area of uncertainty.
Also, let people know that they can and should do what they need to take care of their families. Especially for companies doing remote work for the first time, the tendency when people work from home is to work all the time and not exercise or spend time doing the personal things they need to stay sane.
As CEO, it’s critical for you to be out in front with a planned cascade of possible actions based on which scenarios unfold, likely more aggressive than your team can imagine right now.
Since the world today is no longer the same as it was a month ago, and likely will be worse a month from now, if your business model today looks the same as it did at the beginning of the month, you’re in denial.
It’s the nature of entrepreneurial CEOs to be optimistic, however, you need to quickly test your assumptions about customers and revenue.
Have your customer’s sales dropped? Have their customer’s sales dropped? In the early stages of 2008, most people assumed that the crisis would be limited to the real estate market. It quickly became apparent that our global economy was much more tightly linked than most people believed and the contagion spread around the world and into nearly every market.
Will this time be different? I don’t know, but the base case assumption should be no.
You must, must, must do the math. Every CEO or founder I have had go through a scenario planning exercise has been unpleasantly surprised. Entrepreneurs are optimistic by nature. That’s great, but that optimism needs to be tempered by the real world.
I’ve put together a Budgeting and Forecasting template here which you can use to do your own projections.
Each column represents a different scenario for what a typical month in the business will look like going forward. You may need to make some tweaks to get it to fit your business but the basics are pretty simple:
- Estimate your monthly revenue going forward from most optimistic to most pessimistic scenarios. In this spreadsheet, I do it by multiplying average order value by number of orders which may or may not be appropriate for your business. You should have a decent idea of your revenue streams through so plug them in as needed.
- Estimate your Cost of Goods Sold for each revenue level. Though this will vary based on the revenue level, just try to get it +/-10% and err on the side of being too conservative (i.e. assume it is worse).
- Then go back in and fill out your monthly expenses. I usually do this by looking at the previous year or twelve months and averaging across each category. Again, err on the side of being too conservative (i.e. assume it is worse).
You can see in my example here, the business is still profitable under the two most optimistic scenarios but losing money under all the remaining scenarios.
The goal here is to figure out what cuts would need to be made at each level to make the company sustainable. I’ll put together a general list below, though obviously this will depend quite a bit on your business model.
Having this plan written down upfront is important. When you get to that level, you’ll know what needs to be done instead of waffling on it.
If you are a startup with cash in the bank, it’s probably fine to run at a loss, but you should know how much runway you have left and be conservative about fundraising prospects (i.e. assume it will take twice as long to raise half as much money at a worse valuation and terms than you want).
Cutting Obvious Expenses
Here are some ideas for expense cutting.
Cut any paid advertising that’s not 30 days ROI. You can always turn it on again later.
If you have an office, call your landlord and explain what’s going in. Ask him or her for their thoughts. Most landlords would rather work with you with maybe a rent reduction, or deferment, or something, than have to deal with a business that may just fold and leave them with an empty space in the middle of a collapsing economy.
If you have loan payments, talk to your lender. Many have offered to cut payments by 50% for a period of time until things get sorted out. If nothing else, it’s free cash flow in a time of uncertainty – so even if you don’t need it you should take whatever is available.
It’s a good time to cut underperforming staff. No one likes firing people, but if there was someone you had been considering letting go for a while but things were too busy or there was no pressure to do so, now is probably that time.
Are you on higher-end software or subscription plans that could be downgraded? Downgrade anything you don’t need. Or using software that isn’t profitable? Pause or suspend accounts for the interim until you need them again.
Cutting Less Obvious Expenses
No one knows if this is a three-month problem or a one-year problem. If it’s a three-month problem, the steps above along with (hopefully) a little cash cushion going into this may be sufficient.
If it is a one-year problem, it means taking a knife to your burn rate (layoffs and elimination of perks and programs to reduce your variable expenses), renegotiating what previously seemed liked fixed expenses (rent, equipment lease payments, etc.) and keeping only the essential elements for survival.
What happened to many in 2008 was people were slow to let anyone go and then they burned through all their cash and had much bigger layoff once they were lower on cash.
Taking salary cuts across the board is a reasonable first step for most companies to extend their runway.
If it is possible to reduce hours and/or furlough and get government support for those with pay cuts or furloughs, that is likely a better solution for everyone than having to do massive layoffs in a few months.
Finally, if your business was already faltering, consider strongly just shutting it down. If your business was struggling in good times for the economy, it’s unlikely to start booming in bad times. Again, this is why it is important to do that math. What do your fixed expenses (labor, rent, insurance, etc.) look like? Make a decision upfront when you will cut the cord. Sinking more time and money into a struggling business as we go into a recession is not a good plan.
Generate More Revenue
Obviously, finding a way to generate more revenue would be ideal. This will be easier for some businesses than others, but it’s certainly worth implementing and testing opportunities here.
If you are a local business, try to use your email list to pre-sell gift cards to existing customers. Many people don’t want their favorite restaurant/cafe/bar to go out of business and are willing to help out. Support Local from USA Today offers a portal to do this.
If you have inventory, but can’t move it, look for things to sell on eBay, Craigslist, Amazon or Facebook marketplace based on your existing inventory. I am seeing a lot of restaurants just selling their inventory as groceries. It’s at least better than eating the cost.
If you have the ability to pivot into a new category (admittedly, most businesses don’t), then you should absolutely take advantage of it. While some businesses are struggling, many are having record-breaking months (e.g. Food and Bev companies). I have seen a few businesses that were able to repurpose existing production facilities to manufacture in-demand goods.
Focus on conversion rate optimization and improving your average order values using upsells or cross-sells since that is also free.
Though you should be doing it already, email marketing is also an obvious thing to crank up right now as there is very little cost associated with it and it tends to be the highest converting channel for most businesses. Try sending your customers an honest email explaining the situation and asking for their support.
Managing Supply Chain Exposure
If your business has significant exposure to the supply chain (e.g. You are an eCommerce company manufacturing in an affected area), it’s worth thinking through what you will do if factories do not quickly return to full production capacity.
Many countries have basically turned off their whole economies and are going to have to restart them at some point. Once that happens, the coronavirus may just pick up where it left off, either from a few people who still have it or from foreign travelers.
Finding alternative sourcing options in unaffected areas would be ideal, but that is typically a multi-month (or more) process and very few areas are unaffected so unlikely at this point.
At the very least, call your suppliers to have a frank and honest conversation about their own supply chain exposure and what (if anything) can be done to mitigate it. Even if the situation is bad, you will be better able to deal if you have an honest picture.
Seek Additional Funding or Cash Flow Relief
Governments around the world are offering various programs to help businesses impacted by COVID-19.
You should probably raise as much cash as you can (assuming you qualify for it, of course). You never can have too much cash in the bank. One similarity I’ve noticed of the companies that survived the dotcom bubble is that they tended to raise money just as the bubble was bursting so that they could ride it out.
Again, no one knows how long this will last but having extra cash and paying a little extra interest is much better than running out of cash.
If you have loans, refinance them if possible. Banks do not want to take over a struggling business in the middle of a major crisis.
Different locations have some government assistance where the government will let you furlough people or reduce people’s hours and the government will make up a portion of that.
American Express and Chase are allowing businesses to delay up to 2 months of payments, interest-free. Just call their customer service and ask!
Your existing vendors can be a great source of credit. They know you and trust. Call them and ask to delay payments for better terms (e.g. Net 30 or Net 60).
Offer an early pay discount for customers that pre-pay or pay invoices sooner to get cash in the door.
Here are some resources for U.S. based companies seeking to apply for funding:
- COVID-19 Business Relief: An Overview for Startups, Consultants, and Freelancers
- Reddit Summary of CARES Act
Managing Production/Fulfilment Centers
Here are some possible safety procedures for warehouse and production teams that are still coming in:
- Staggered shifts to spread out the people in the building.
- Enhance cleanliness – Daily disinfecting between shifts.
- Hand sanitizer and wipes at all stations.
- Gloves and masks for employees if possible.
- Re-organizing and spacing out pack stations throughout the warehouse.
- Moving to “pick your own orders” rather than dedicated pickers passing bins to packers.
Establish an Ongoing Planning Process
The situation is changing very quickly and likely will continue changing in the future. If you have a senior leadership team, establish daily meetings to update the situation and make sure everyone is responding quickly.
Here’s a simple meeting agenda I’ve used for this:
Each person discusses:
- What’s on your mind?
- What’s the progress since the previous call?
- Any challenges? Anything bottlenecking you?
- What are your daily goals?
- Housekeeping – anything else that needs to be discussed.
If you don’t have a leadership team, consider setting up a mastermind with other business owners in your industry. Set up a weekly call for everyone to discuss what they are doing and share ideas and best practices.
In his letter to shareholders back in 2016, Amazon CEO Jeff Bezos gave some sage advice:
Most decisions should probably be made with somewhere around 70% of the information you wish you had. If you wait for 90%, in most cases, you’re probably being slow. Plus, either way, you need to be good at quickly recognizing and correcting bad decisions. If you’re good at course correcting, being wrong may be less costly than you think, whereas being slow is going to be expensive for sure.”
Unlike on a test, you can course-correct later. If you realize two weeks into a new initiative that it’s not going to work, you can drop it and start over. So if you’re procrastinating on making a change, ask yourself how hard it would be to simply revert back at some point in the future. Often, it’s not that hard.
While this is good advice in normal circumstances, it’s especially good advice in a crisis.
Last Updated on April 8, 2020 by Taylor Pearson