No one can predict developments like the COVID-19 crisis. In terms of the speed at which it occurred, its extent and its consequences, it is a truly exceptional event. However, it also clearly demonstrates the problem companies now face: they are operating in a volatile environment shaped by completely unpredictable changes whose causes and effects are barely comprehensible.
SMEs: business planning in uncertain times
The economic climate is more volatile than ever before. What does this mean for SMEs? How can they plan for the future in uncertain times?
As a result, it is also becoming more and more difficult for SMEs to evaluate the future business situation. “One major challenge is the increasingly short-term nature of everything. Orders may be cancelled or appear overnight, for example. This makes it extremely difficult to plan,” explains Marco Gehrig, lecturer at the Institute for Business Administration at the FHS St. Gallen University of Applied Sciences and a member of the Board of Directors at the Provida Group. So how can SMEs still plan for the future in this volatile environment?
How to manage your finances flexibly
The most important tool is financial management, and that will continue to be the case. “That said, the financial management has to be as flexible as the environment in which the SMEs are operating,” Gehrig explains. First of all, companies should consider where their current financial planning is still too slow to tackle the current challenges they are facing. It is generally advisable to have a plan that is both rolling and event-based.
- With rolling planning, the next four, five or six quarterly plans are reviewed, updated, fleshed out and revised at regular intervals, enabling new insights from the company’s environment to be incorporated periodically.
- In event-based planning, the plans are revised not just at periodic intervals but every time a significant event occurs (such as the cancellation of a large order).
The importance of liquidity
In a dynamic environment, liquidity planning in particular becomes even more important than it was before, Gehrig emphasizes. Only if a company’s short-term solvency is secure – for example, in order to pay salaries and creditors – is its survival guaranteed. It is vital in this context to calculate costs realistically and take into account floor prices. “If I offer my product or service too cheaply, I will get into difficulty,” Gehrig says.
Take advantage of customer proximity to prepare forecasts
In addition to flexible financial management with a particular focus on liquidity, Gehrig advises SMEs to do what they have always been good at: to get as close to their customers as possible in order to feel the pulse of the market they operate in. When SMEs talk to their customers, they gain insights into the order situation over the coming months and can use these as a basis for their forecasts. If a company does not have close contact with its customers, the situation can be assessed on the basis of experience.
Prepared for every eventuality with scenario-based planning
It is important to calculate in terms of scenarios. What effect would it have if 20%, 40% or even 80% of your company’s revenues were to dry up? And what can you do in each individual scenario to avert a liquidity bottleneck – for instance, cutting costs or raising capital? Companies that run through worst-case scenarios before they potentially occur can operate more flexibly in a dynamic environment.
Optimism and flexibility – the distinguishing features of SMEs
Marco Gehrig is convinced that the COVID-19 crisis will affect how SMEs plan their finances in the future. “I’m sure they will be very cautious and that some investments which are not essential to operations will be suspended,” he says. At the same time, however, he can also envisage the optimism that characterizes so many entrepreneurs coming to the fore again soon. SMEs have already proven their flexibility in many crises, the present one included. One particular trading company, for example, not only launched a sales app in a very short space of time; it also sought personal contact with its customers, thus taking advantage of another of the SMEs’ trump cards: customer proximity.
About our expert
The link will open in a new window Professor Dr Marco Gehrig is an auditor, a lecturer at the Institute for Business Administration (IFU-FHS) at the FHS St. Gallen University of Applied Sciences and a member of the Board of Directors at the Provida Group.