CRISIS MANAGEMENT & ITS RESULTANT EFFECT IN FINANCIAL
FUNCTION

Crisis management, prima-facie is nothing but the technique of facing and managing the crisis situations in the management of the organization. It could be in managing the crisis in production, marketing, personnel, FINANCE etc. The concept and objective of crisis management is “decisions have to be taken sensibly and instantly”

One of the main reasons for crisis in an organization is due to FAILURE in PLANNING, and the sources of crisis for crisis situations are due to mismanagement of organization’s resource i.e. FINANCE, human resources, and materials and of all these finance is of utmost important as it is the life blood of business. In many business organizations the top financial people (say CFO, CFC, Sr.Managers etc) are facing financial crisis and fighting the situations by finding quick but temporary solutions instead of finding integrated solutions and remedies to the financial crisis.

The financial crisis is of two types (a) short term crisis (b) long term crisis. The former is usually related to the operational modalities of the organization and is generally connected with “ funds management”. The latter on the contrary also known as strategic origin is of two types i.e. (a) genetic (b) brewed, the former arises as a result of situations born within the organization estimating the long-term requirement of funds for Capital Structure. The latter slowly emerging with the organization as a result of growth of Industry and products.

One of the main causes of short-term crisis is due to uneven cash flow created because of supplier driven problems –for instance the supplier of goods/raw materials suddenly imposes a stiff credit terms/squeeze, which was never anticipated by the Finance Manager. This will naturally end up with an unanticipated funds crunch. The prime supplier of materials, due to his own problems forces the organization to buy more than usual quantity of materials and insists on instant payment ignoring the credit terms, resulting in unexpected cash out flow. Customers also cause cash crunch to the organization. For instance an important& long standing customer, a customer of special significance fails to honour the financial commitments requesting the organization for extended credit terms all of a sudden, puts the organization into funds crunch and also the fact remains that the FM will find it extremely difficult to turn down the request of the customer.

Another major concern and cause of crisis is UNPLANNED capital outflows due to sudden turn of events in the organization. By way of unplanned modernization in technology. Diversification etc. will force diversion of funds meant for normal and usual operations, will lead to the funds crisis situation. Projects over run affecting cost and time will lead to increase in cost of funds, as the cost of borrowings is extremely high in such circumstances.

Genetic crisis is as mentioned earlier, born with the organization due to initial faulty financial planning and capital structure heavily based towards debt which will have to bear its own implications in on the cost of the capital, expectations of the share holders and on the debt service. The right planning would be that the cost of the permanent part of the working capital should be financed with long-term funds and any failure on the part of the FMs on this can cause technical insolvency to the organisation. Capital restructuring may also be done to rectify the technical differences and may need adjusteements in production, sales, recoveries and substitution of debt for equity.

Brewed crisis is a typical and long-term crisis and arises due to factors like industry competitors, Inter-company rivalry, and arrival of new entrants and threat of substitute products and will assume a massive proportion in the course of time. Yet another harmful effect is the increase of then new entrants causing rising capital cost, reduced market share, inter-company rivalry will result in increased market cost due to sales promotion measures and activities. It also forces the organization to expand the product range leading to cost increase with constraints for price revision.

It is all good for the customers. as their bargaining power increases, additional and favorable credit terms with delayed recoveries. This kind of quick change in the ratio will adversely affect the liquidity of the organization. The rule to be followed is that such crisis situations should be averted and anticipated than tackled. However limited the resources are, the FMs should learn to face the crisis situations. The degree of success is not in the number of times one falls into it or faces such situations but how quickly one recovers completely.

A true introspection on the matter will revel that nothing but failure in planning causes the crisis one after another.

DO NOT FAIL TO PLAN
UNLESS YOU HAVE PLAN
TO FAIL


J.KANNAN