The CEO in a Time of Crisis
By: Trey Taylor Trinity-Blue
Tags: Entrepreneurship, Startup, Management, Leadership, Business

Part One: Preparing for the Unknown

Uncertainty is a mainstay of modern business. But while we may not be able to predict the future, we can prepare for it. For the CEO, preparation begins with the acknowledgement that future events will occur over which we have no control and for which we receive no warning.

During the past few weeks, we have been forced to confront the Coronavirus and the enormity of the threat it represents.

Yet the rise of a global pandemic is but one of the many unknowns for which the CEO must prepare. These run the gamut from economic recession to disasters such as 911 and Hurricane Katrina. On a more micro level they might include the loss of a major client, pressure from a new competitor, or a government ruling that suddenly shuts off important export markets.

Because these events lurk somewhere in the future, they usually remain off the CEO’s mental radar. Often, even when they are known, far too many CEOs will succumb to a phenomenon called normalcy bias — the tendency to believe that things will function in the future in the same way they have in the past. Doing so causes us to underestimate both the likelihood of a threat and its possible effects.

Think of natural disasters. Follow-up to events such as Hurricane Katrina and Tropical Storm Sandy reveal that most companies were unprepared for these events. Would you have been?

If tomorrow, a natural disaster struck your business, what would happen in the days and hours that follow? Would you be ready operationally? Logistically? Financially? Do you have an emergency plan that addresses all of the contingencies? Most companies do not.

Another example of unpreparedness is businesses that continue to ignore the scale and immediacy of the cybersecurity threat. According to the World Economic Forum, security breaches increased by 67% over the past five years. By 2023, approximately $5.2 trillion in global value will be at risk from cyberattacks with the average costs of an attack coming in at more than $1 million.

The risks to both corporations and investors are large. Yet research shows that most companies continue to ignore the threat. Small and medium-sized business are particularly lax in addressing the threat, preferring to fall back on a logic that says “It’s a problem for the big corporations, not us.”

It’s a baffling response, especially when you consider that more than 60% of small businesses fail within six months after a cyberattack while larger organizations suffer from the loss of reputation as well as steep fines.

Preparation Begins with Cash Reserves

One of the CEO’s key pursuits is to get and spend money in the right way. Often missing from these considerations, is how to also save money in the right way.

During the financial crisis of 2008 and 2009, nearly every business owner across the United States faced dire circumstances.

As the economy ground to a halt, the just-in-time revenue that many businesses relied upon to fund their operations during times of prosperity dried up. Hardly anyone was buying anything, and even the most loyal customers stopped buying products or using services because they did not have the money to spend.

Everyone was making difficult decisions at this time. The businesses that survived often did so largely because of their cash reserves.

Nearly everyone tried cost-cutting and layoffs. That helped. But the recession was so deep that simply trimming expenses was not enough. That experience affected me deeply, and it showed me that part of a CEO’s responsibility for the numbers is to have a contingency plan in place if the bottom should fall out.

In chess, there is a word for placing your opponent in such a position that you remove every single option she has except for the move you want her to make. In other words, you decide her moves in advance based on the circumstances you create. This is called zugzwang.

I never want to have my options as a CEO decided for me.

The only way to maintain your positional freedom in difficult business circumstances is to have a cash reserve built up for emergencies. If you are able to endure hard times, you will not be forced to choose to lay off half your workforce to avoid bankruptcy.

In practice, cash reserves can intimidate some CEOs because they believe that capital should be put to use. The cash reserve does not necessarily prevent you from leveraging it, but when I suggest that a business set aside a full year’s worth of operating expenses, I often see looks of astonishment.

Building up that reserve might be difficult to do, but having that capital locked away is incredibly freeing. Even under the worst business conditions, no one will ever be able to force your hand. That cash reserve, even if you never touch it for any reason other than emergencies, is a huge source of freedom and autonomy.

An accountant will never look at you and say, “You have to fire someone if you want to keep the doors open.” Instead, you have a cushion to brace for problems and solve them long before the wheels fall off.

When you are not staring down a recession, your cash reserve gives you a springboard for pursuing growth. With capital on hand, you can seize opportunities more quickly, better calculate the potential reward of taking a risk, and use your reserves as a negotiating tool to open new opportunities.

Underlying the benefits of a cash reserve is the idea of acting intentionally and not reactively.

If the cash reserve is in place, you can make educated, well-reasoned business choices. When you take the net from under the tightrope, however, looking beyond the step directly in front of you can be more difficult and can handicap your business.

Building up the cash reserve is a matter of disciplined savings.

Look at your KPIs, and determine how much you can save each month without compromising the stability of the business. Then begin to move money into the reserve.

Though I recommend setting aside 12 months of runway — built up gradually over time — I often encounter business owners who cannot possibly imagine a future where they set aside that much capital. Six months of runway or even three months of runway are less ideal, but some cash reserve is better than no cash reserve.