Nirav Doshi, CFO, The Rose Group, 0
In these unprecedented times, can the financial managers draw lessons from an analogous environment that practices risk management actively and where the risk mitigation initiatives have matured and evolved over time?
I could think of risk management protocols followed by the aviation sector as a relevant parallel on matters of safety and disaster management.
In-flight safety announcements, though sound monotonous and boring, have life saving potential in the event of an accident or an unforeseen mishap. Interestingly, some of these in flight safety protocols have a parallel in ‘financial management’ terms, which could enable mitigation of financial risks arising from severe financial turbulence arising from a pandemic event. I will explain a few of these inflight safety announcements to illustrate the point.
“There are several emergency exits on this aircraft. Please take a few moments to locate your nearest exit. If we need to evacuate the aircraft, floor-level lighting will guide you towards the exit”, so that you can swiftly exit the aircraft should there be an emergency. In financial terms, assess the sufficiency of banking lines of credit when the going is smooth and operations are normal. This will enable you to have in place a plan to access funds in an emergency (and quickly evacuate from the immediate financial distress in the short term). You will not have the luxury to get your banking credit lines assessed and sanctioned in a crisis.
“When the seat belt sign illuminates, you must fasten your seat belts”, you would not want to be tossed around, risking injury, if the aircraft is flying through turbulence. When the markets are disrupted and the business is volatile, tighten the credit assessment(seatbelt) norms for all the customers. Tightening seat belts in a turbulent phase for a business will also involve securely tightening fixed operating spend, making smallest amount of spend more effective. Cutting down unwanted expenses would be ever so important for any business to spring back to life, with agility.
“In the even to fade compression, an oxygen mask will automatic ally appear in front of you. To start the flow of oxygen, pull the mask towards you” so that lives can be saved while an aircraft in a distress situation may still need some time to land safely. The most critical lesson
this pandemic event has taught financial managers is that of maintaining solvency capital on the balance sheet. So far, business entities have focused on raising fixed capital (for capital expenditure) and working capital. Only regulated businesses such as banks and insurance companies are traditionally mandated to maintain solvency capital on their balance sheet. The same concept will now need to be extended to the unregulated sectors.
Quantifying and retaining solvency capital will ensure that in a financial emergency, cash (oxygen for business) can be accessed at a short notice by simply dipping into the solvency capital (the oxygen mask). Normally a business may never need to access its solvency capital, just as we might never need to pull those oxygen masks, but just in case you need to, this safety net will help bailout.
“A life vest is located in a pouch under your seat or between the armrests. When instructed to do so, open the plastic pouch and remove the vest”. On January 15, 2009, Captain “Sully” landed an Airbus A320 in New York’s freezing Hudson River following a bird strike induced loss of both the engines. All 155 passengers and crew on board US Airways Flight 1549 survived. I am sure these passengers and crew would remember the importance of those life vests, throughout their lives.
In a business situation, where are these life vests who can save the business from drowning? The answer is investors, bankers and creditors. Relationships and rapport cultivated with the investors, bankers and creditors during normal times will determine whether they will extend you the much needed life vest in the times of a financial crisis. The strength and depth of these relationships life vests will determine how strongly the business enterprise can navigate a water landing situation.
“This is a non-smoking flight. Tampering with, disabling or destroying the smoke detectors located in the lavatories is prohibited by law”. Flying safely is all about following protocols, discipline and rigorous standard operating procedures. In good times, each business needs to define its own “no-smoking” rules to ensure that business is operated profitably and working capital gets managed tightly. These “no-smoking” rules in an operating environment will relate with the resilience of the economic model of a business that can sustain shocks, margin and profitability profile that gets converted into cash quickly and not permit any non-performing asset to creep up on the balance sheet. A “non-smoking” organization will invariably have a healthy balance sheet and withstand any future shocks like Covid-19, better and with greater resilience.
Quantifying and retaining solvency capital will ensure that in a financial emergency, cash (oxygen for business) can be accessed at a short notice by simply dipping into the solvency capital (the oxygen mask). Normally a business may never need to access its solvency capital, just as we might never need to pull those oxygen masks, but just in case you need to, this safety net will help bailout.
“A life vest is located in a pouch under your seat or between the armrests. When instructed to do so, open the plastic pouch and remove the vest”. On January 15, 2009, Captain “Sully” landed an Airbus A320 in New York’s freezing Hudson River following a bird strike induced loss of both the engines. All 155 passengers and crew on board US Airways Flight 1549 survived. I am sure these passengers and crew would remember the importance of those life vests, throughout their lives.
Quantifying and retaining solvency capital will ensure that in a financial emergency, cash (oxygen for business) can be accessed at a short notice by simply dipping into the solvency capital (the oxygen mask)
In a business situation, where are these life vests who can save the business from drowning? The answer is investors, bankers and creditors. Relationships and rapport cultivated with the investors, bankers and creditors during normal times will determine whether they will extend you the much needed life vest in the times of a financial crisis. The strength and depth of these relationships life vests will determine how strongly the business enterprise can navigate a water landing situation.
“This is a non-smoking flight. Tampering with, disabling or destroying the smoke detectors located in the lavatories is prohibited by law”. Flying safely is all about following protocols, discipline and rigorous standard operating procedures. In good times, each business needs to define its own “no-smoking” rules to ensure that business is operated profitably and working capital gets managed tightly. These “no-smoking” rules in an operating environment will relate with the resilience of the economic model of a business that can sustain shocks, margin and profitability profile that gets converted into cash quickly and not permit any non-performing asset to creep up on the balance sheet. A “non-smoking” organization will invariably have a healthy balance sheet and withstand any future shocks like Covid-19, better and with greater resilience.