Crisis situations and optimal decisions

Cosmin Cricleviți

Crisis situations - factors and causes

What do we do when our organization is in an unfavorable moment, more precisely when we encounter crisis situations? Constantly there are factors that erode our company's results. Sometimes they are visible factors and force us to take immediate action, sometimes they are masked factors that can be overlooked and noticed only when the effects are already very serious. There are also situations when we do not have the necessary knowledge to observe and identify a problematic situation or effectively, also due to a lack of managerial skills, we make wrong decisions that have unpleasant and initially unanticipated effects.

Money scarcity within the company

Regardless of the source of the problems, what really matters is the practical and real identification of their causes.

One of these serious problems, very frequent by the way, is the "insufficiency of money" in the company. Except for the situation where the lack of money is only a matter of cash-flow, i.e. invoices not paid on time by customers, the most common situation is the one where the amounts of capital entering the company do not cover the amounts of money leaving the company. The question that always arises in this case is what should I do? Do they increase revenues or reduce expenses? The logical answer is: both!

The peculiarity of this bivalent answer is that in the case of income we do not have total control because it is other people's money and we can only get it under certain conditions and with limitations given by the size of the market, seasonality, etc. Probably, in this chapter every entrepreneur has already done almost everything possible trying to maximize the income obtained. Starting from this reality, we will realize that we only have total control over expenses, being the only ones who establish, through our decisions, the planned and the actual level - of the organization's expenses. Regarding this chapter, that of expenses, there is a principle that it is recommended to keep in mind when we think about committing expenses: "Money from the pocket/account is the cheapest money because we no longer have to work or make efforts to get/possess them!” For this reason we should not give up this resource easily, but be careful to use it only for what is absolutely necessary within the company. It sounds simple, but the "staging" of these principles is not always easy.

What are the key elements through which we can optimize expenses?

  1. First of all, we need to know our internal processes and realize what is the actual resource requirement for the efficient execution of process cycles so that we get the products or services expected by our existing and potential customers. All these needs can be quantified in money and thus we will have clear data on the order of magnitude of the financial resources needed for a month or a year.
  2. It is necessary to understand the impact of each expense in the process and to what extent this expense influences the final result.
  3. It would also be very useful to know the level of added value in each activity to understand what percentage of the resources allocated to that activity turns into added value and how much becomes loss or waste.
  4. It is extremely important to have a defined and stratified structure of total expenses grouped into categories and classes of expenses, more precisely to operate starting from a structured budget.
  5. The assumption of a rigorous budgetary discipline both regarding the revenue budget and the expenditure budget.

When the above principles are met we will result in a clear overview and breakdown of all aspects that generate expenses. At this point we can analyze which of these are necessary in the process and which are not absolutely necessary and can be removed or reduced to close to 0.

At the same time, we can analyze if the current existing expenses are at the required level or are above the optimal level or if they mask losses or waste in the activities for which resources are mobilized.

Managerial decisions generated by numbers

The information obtained in this way will help us to analyze the efficiency of the process as a whole and will also give us clues about how we can streamline the processes so that they require less resources.

In conclusion, it is necessary to understand very well what is happening in the company in order to be able to control and optimize expenses so that we do not jeopardize the value generated for the customer and, consequently, the generation of income for the company. From our perspective, arbitrary budget cuts should be prohibited!!! In principle, we never cut randomly for the simple reason that there is a real chance that we will lose much more than we save.

The most effective way to have real-time information about all of the above is to use digital tools such as Adaptive Financial Management and track, through them, the level of budget discipline as well as the actual results compared to the targets. It is extremely likely that the use of these tools, accompanied by a rigorous budgetary discipline, will help us avoid the crisis situations identified above for the simple reason that they provide us with all the necessary levers and data to be able to make correct and reasoned managerial decisions. Another consequence of using Adaptive Financial Management is that we will achieve financial stability and predictability.