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Careful planning can reduce the dreadful uncertainty we face

25th January 2022

The last two years have seen the least predictable business conditions most of us can remember. Covid threw 2020’s plans out of the window and has made the future entirely uncertain ever since. We hope, but still cannot be sure, that conditions will return to some degree of predictability in 2022.

And that’s just one source of uncertainty. Political risk is growing. Ethiopia has a war. Ukraine fears invasion by Russia, with unpredictable economic consequences around the world. Our Kenyan office expects business to pause as clients batten down ahead of the August election. Our South African team keeps an eye on the conflict in the ruling party, while people fear a repeat of the ruinous riots of July 2021.

Companies have to prepare for the unexpected in politics, economics, technology, weather, health, and sudden changes in the competitive landscape.

Those external risks are mirrored in internal risks. A key team member may leave or have an accident. Software may be hacked. If you depend on a single piece of equipment that you cannot repair, as the driver’s licence authority did in South Africa, you risk losing your capacity to operate.

One way companies can reduce uncertainty is to analyse risks annually and take steps to mitigate them. Risk analysis is a routine part of corporate life – skilled staff or specialist consultants follow prescribed templates and report to the board.

Small businesses may lack these resources, but we find that even very small firms can benefit from describing scenarios for what might happen in the future and completing a simple organisational risk analysis to see how they would cope.

Among external risks. an obvious question is what might happen to your market. During lock down, restaurants lost their market overnight and had to find alternative ways to supply it. They in turn were customers for firms that supply food, equipment, and other consumables.

Suppliers too might be a source of risk. During civil unrest firms may be unable to source raw materials, as when the N3 between Durban and Johannesburg was blocked. A difficult judgement call is how much to stockpile essential materials. Too much ties up capital and requires storage; too little leaves you stranded if suppliers are hit. So a time of heightened external risk may be the time to increase inventory.

External risks are often difficult to identify, but small firms, in particular, can benefit from an internal risk analysis. How ready is my business to survive a crisis?

Cash flow is of course the first place to look. A company can fail even when sales are buoyant if cash dries up. That can happen when customers find themselves unable to pay for their orders. It can even occur paradoxically when sales boom, if the cost of producing services or goods is incurred before payment is due. So do you have access to finance should you need to draw on it? It makes sense to put aside some profits regularly in a contingency fund.

Businesses need to track the trend in accounts receivable. Are some customers showing signs of stress?

When a crisis hits, the loyalty, commitment and emotional health of the team becomes even more important than usual. So wise leaders build morale while times are good and create a culture of trust and mutual support. They also plan for staff absences, like ensuring team members can perform each others’ tasks.

Finally, how well are you equipped personally to face a crisis? Successful entrepreneurs are resilient. Before a crisis hits, look for things that build resilience, like supportive friends and family, faith in the significance of what you are doing, and supportive personal habits like a healthy diet, enough sleep and regular exercise.

Jonathan Cook is chairman of the African Management Institute


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