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When Things Go Wrong

Provided by the International Finance Corporation


Business, as in life is full of surprises. Even the most thoroughly planned businesses will likely face unexpected events that can have a catastrophic effect. Here is a full list of some of those unexpected events and how you might cope with them or, even better yet, put strategies in place now to limit the impact those events could have on your business.

 

KEY STAFF RESIGNS ABRUPTLY

Problems that can be caused

  • Loss of technical skills
  • Loss of capacity
  • Loss of leadership
  • Feeling of betrayal

Working through it

  • Stop feeling sorry for yourself
  • Find out why they want to leave and try to convince the person to stay, if that fails….
  • Be prepared to take on a more hands-on role to fill the gap
  • Make sure the staff member leaves behind all company property (including intellectual property) and is off payroll
  • Share the workload amongst remaining staff as fairly as possible
  • Contact anyone you know who might have the skills you need
  • Consider paying a higher price for a temporary staff member
  • Contact staff from a competitor, maybe someone there wants to leave

What to do beforehand to limit the impact

  • Train all staff in multiple jobs
  • Ensure key staff have a longer than average notice period (e.g. 3 months)
  • Consider putting in a non-compete clause in employment contracts to stop staff joining a competitor
  • Keep track of people in the industry or technical sector who might one day work for you
  • Join online networks of people in the industry or sector, use it to find staff quickly
  • Take great care not to put too much responsibility on one person
  • In some countries, it is possible to take out key staff insurance policies
  • Keep your staff aware of your plans, that is often enough to generate loyalty.

Opportunities

  • Time for a reshuffle of roles and responsibilities?
  • Chance to reward another staff member with an overdue promotion
  • A new staff member could bring new energy and ideas
  • This is a chance to really test the market for a particular skill-set, use it.

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SUDDEN ARRIVAL OF A NEW COMPETITOR

Problems that can be caused

  • Loss of sales
  • Product confusion amongst customers
  • Potential loss of staff
  • Reduced availability of raw materials

Working through it

Act to keep your customers by offering

  • Discounts
  • Match competitors’ prices
  • credit terms
  • Loyalty rewards

Act to keep your suppliers by offering

  • Advanced orders
  • Faster payment
  • Larger orders

Act to keep your staff by offering

  • Salary increases
  • Training

For long-term staff, shares in the business

What to do beforehand to limit the impact

  • Build up brand loyalty by providing benefits to long-standing customers
  • Monitor competitors’ prices regularly
  • Adjust prices to match competitors as much as possible
  • Secure long-term supply arrangements with key suppliers
  • Ensure that your salaries match or are better than competitors

Opportunities

  • Could there be a strategic alliance with the new competitor?
  • Will the competitor consider buying your business?
  • Is it time to move to a new market
  • Can you diversify your products or services?
  • Is it time to invest in new machinery or modern production or delivery methods?
  • Is it time to use more IT in your business to cut costs and expand the market?

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LATE PAYMENT BY LARGE CUSTOMERS

Problems that can be caused

  • Cash flow problems
  • Potential loss of a large customer
  • Potential legal costs to recover the money
  • Could be an indication of tough times ahead for many customers

Working through it

  • Stay in contact with the customer
  • Find short-term financing to cover the cash deficit
  • Consider charging a late payment fee
  • Seek legal advice in case court action is necessary later
  • Offer a payment plan
  • If it looks like the customer is going out of business, suggest a large discount for immediate payment – better than getting less than that, or nothing at all, many months from now after liquidation

What to do beforehand to limit the impact

  • Try to limit the percentage of total sales to any single customer
  • Include in conditions of sale, a clause that states the goods belong to the seller until paid for in full
  • Consider using a factoring service
  • If payments are delayed consider carefully if additional sales should be made to the same customer
  • It might be possible to obtain bad debt insurance

Opportunities

  • Time to diversify the customer base?
  • Is the customer a potential investment target? Now might be a good time to convert a debt into an asset.

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PROBLEMS WITH BANKS

Problems that can be caused

  • Refusal of loan/overdraft applications
  • Poor credit rating shared with other lenders
  • Early repayment of existing loans/overdrafts

Working through it

  • If problem is personal, recognise that this is not a relationship of equals. The bank has money, you need it. They hold the power
  • Open discussions with an alternative bank about transferring accounts, loans and overdrafts

What to do beforehand to limit the impact

  • Maintain relations with more than one bank
  • If negotiating a loan ensure there are no early repayment fees- this could stop you moving the loan to another bank
  • Maintain good personal relationship with the bank manager assigned to your account

Opportunities

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BAD DEBT

Problems that can be caused

  • Cash flow problems
  • Loss of big customer
  • Could signal deeper market problems

Working through it

  • Keep records of all communications and efforts made to recover the money – this could be useful when negotiating credit from your bank or other lender to cover the cash shortfall
  • If the customer is still in business, consider legal action

What to do beforehand to limit the impact

  • For all new large customers, conduct a customer evaluation – sometimes referred to as ‘know your customer’
  • For overseas customers, your government might offer some export protection or support
  • Consider asking large, new customers to pay a proportion of the price in advance

Opportunities

  • Chance to reflect on sales practices – could this have been avoided?

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CURRENCY DEVALUATIONS

Problems that can be caused

  • Cash flow problems
  • Higher prices for imported materials
  • Higher income from international sales (if any)
  • All prices will tend to rise in time including wages but it might not be possible to raise local currency selling prices
  • Bank might wish to renegotiate loans or overdrafts to increase the interest rate

Working through it

  • If possible set sales prices in a foreign currency
  • Find local suppliers for any materials currently imported
  • If foreign currency is needed to purchase imported materials, wait as long as possible – the exchange rate is likely to settle down after a few weeks once panic buying of foreign currency subsides
  • If the business exports and receives payment in foreign currency, use the windfall profits as a strategic reserve for future expansion 

What to do beforehand to limit the impact

If your business buys imported materials

  • Consider holding some cash in the foreign currency
  • Keep looking out for local suppliers of those materials

If you export and get paid in foreign currency

  • Consider opening an additional outlet or production site overseas to counter the impact of devaluation on the business

Opportunities

  • Overseas expansion
  • Get into exporting
  • Find more diversified suppliers at home and overseas
  • If bank tries to raise interest rates, shop around for an alternative – not all banks will be affected equally by currency devaluations

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MACHINERY BREAKDOWN

Problems that can be caused

  • Loss of production
  • Staff sitting idle
  • Loss of sales

Working through it

  • Search for alternative production capacity
  • Consider purchasing a new machine which might be cheaper than waiting for a repair
  • Move idle staff on to other tasks

What to do beforehand to limit the impact

  • Sign a maintenance contract
  • If available, buy machinery breakdown insurance
  • Make arrangement with a competitor to allow use of each-other’s machines in the event of break downs
  • If the critical machine is old, consider holding a high stock of the output of that machine so that sales are not affected
  • If it is affordable, keep a second identical machine as standby
  • Make sure staff are trained in other functions so they can be put to use when ‘their machine’ is idle 

Opportunities

  • Maybe time to invest in a new machine
  • Perhaps get the machine completely overhauled or upgraded rather than just repaired

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MARKET CHANGES

Problems that can be caused

  • New regulations add costs
  • Exchange controls affect movement of funds
  • New technology threatens to destabilise current business norms

Working through it

  • Remember, all your competitors will be affected in the same way – don’t panic
  • Understand the changes quickly and fully
  • Embrace the new technology (even if you can’t yet make use of it)
  • Stay in touch with customers and reassure them that things will be fine

What to do beforehand to limit the impact

  • Join a trade association or chamber of commerce – they are often consulted about proposed changes to regulations and will keep you informed
  • Make political connections to learn about proposed changes introduced by government
  • Become an activist in favour of/against the action that could be taken

Opportunities

In business, as in life, the quickest to adapt to new situations are usually the ones who survive 

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POLITICAL UNCERTANTY

Problems that can be caused

While everyone waits to see what will happen

  • Customers may be reluctant to buy
  • Banks may be reluctant to lend
  • Most government procurement goes on hold

Working through it

  • Remember that everyone is in the same boat
  • Consider selling outside the country
  • Ask lenders to allow a repayment holiday
  • Encourage customers with discounts and deals
  • If it continues for more than a short time, consider shutting to save on running costs if sales figures don’t justify staying open
  • Stay in touch with customers and reassure them that things will work out

What to do beforehand t limit the impact

  • Try to sign flexible contracts with staff (e.g. bonuses in busy times and temporary lay-offs in lean times)
  • Consider setting up a satellite outlet or production site in a neighbouring country that can be rapidly expanded if the main site is significantly affected
  • Set up an uncertainty fund to be used in times like these

Opportunities

  • Great time to train otherwise idle staff
  • Great time to overhaul otherwise idle equipment

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For more resources

Copyright © 2000 - 2017, International Finance Corporation. All Rights Reserved.

© International Finance Corporation [Year of First Publication].  All rights reserved.
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Washington, D.C. 20433
Internet:  www.ifc.org
 
The material in this work is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law.  IFC does not guarantee the accuracy, reliability or completeness of the content included in this work, or for the conclusions or judgments described herein, and accepts no responsibility or  liability for any omissions or errors (including, without limitation, typographical errors and technical errors) in the content whatsoever or for reliance thereon

2121 Pennsylvania Avenue, N.W., Washington, D.C. 20433, www.ifc.org

The material in this work is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law.  IFC does not guarantee the accuracy, reliability or completeness of the content included in this work, or for the conclusions or judgments described herein, and accepts no responsibility or  liability for any omissions or errors (including, without limitation, typographical errors and technical errors) in the content whatsoever or for reliance thereon.

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