How to Handle a Reputational, Operational or Financial Crisis

It’s almost inevitable that at some point in your business, you’re going to face a crisis. PwC’s 2019 Global Crisis Survey of 2,084 senior executives in 43 countries found that 69% of businesses had experienced a crisis in the last five years, and 95% expect to experience a crisis in the future. 

What do businesses mean when they call something a crisis? It can be an incident that disrupts your operations, affects cash flow or revenue or hurts your reputation. According to the PwC report, other common crises are technological, humanitarian, legal or relating to human capital. The worst crises may involve more than one of these disruptions.  

Since crises are inevitable, it makes sense to prepare. But how do you do that, and is every crisis worth responding to? These tips can help you deal with reputational, operational and financial crises. 

How to Handle a Reputational Crisis

A reputational crisis can cause widespread damage to a company, and part of the reason is that it has a domino effect on other parts of the business. The PwC report showed that among those who'd experienced a reputational crisis, 24% found that it led to at least one subsequent reputational crisis, 20% saw it lead to an ethical misconduct situation, and 14% saw a resulting leadership change.

According to crisis media and communication consultant Nadine Drummond of Brawta Communications, “Reputational risk can pose a threat to the survival of the biggest and best-run companies and has the potential to wipe out millions or billions of dollars in market capitalization or potential revenues. A diminished reputation impacts your ability to build and expand your business and so the management of reputational risk is paramount."

The key, she says, is to act quickly, and to set ego aside. “If business leaders have not mastered the art of the 'ego death' during their careers, they will not have the emotional intelligence to move quickly enough to recover from or avert a crisis even if they employ a recovery strategy. This is a leadership failure that is often overlooked and is directly tied to the management of reputational risk," Drummond says.

She explains ego death as taking responsibility, something executives sometimes fail to do: "For many unchecked ego-driven executives when a crisis arrives they shift responsibility or fault to others, claiming the situation was the “regrettable actions of employees” or even blaming the victimized customer. These actions are driven by self-importance and corporate superiority which demands no accountability."

Drummond adds: "Business leaders must express clear and genuine regret, must give a logical reason as to why the breach or event happened, and provide a socially or culturally acceptable remedy.”

How to Handle an Operational Crisis

An operational crisis is anything that disrupts day-to-day business, like losing a key client or being affected by a natural disaster or, say, a global pandemic. 

Erik Engstrom, a serial entrepreneur with a background in risk and business continuity management for Fortune 500 companies, says one approach is to move quickly to put alternative scenarios in place. For example, many restaurants have turned to outdoor seating to help them deal with crowd restrictions resulting from COVID-19. 

Clearly, some crises catch businesses by surprise, but Engstrom says that since facing a crisis is almost inevitable, it's better to create a plan in advance: "The core concept of business continuity is what do I need to protect? What do I need to conduct? What do I need to charge, and what do I need to replenish?”

In other words, think about what you need to stay in business. Often, Engstrom says, there are short-term alternatives, like temporarily operating from somewhere else, or finding a different way to contact customers and handle bookings and payments. 

How to Handle a Financial Crisis

In handling a financial crisis, communication with employees is key. For example, some companies spoke openly about the financial situation to their employees and invited those who could to take temporary pay cuts. In many cases, the CEOs took pay cuts as well. This helped them retain valued employees for when business picked up again.  

But where possible, it's wise to prepare in advance, says Engstrom, and to take advantage of insurance protections. "Work within an insured infrastructure. Use bank systems that are insured with third party services. You can open a bank account in Florida, and qualify for FDIC."

He also advises businesses to protect against liquidity problems in advance by dividing their capital among multiple financial institutions. "Don't allow a single agency or single person to have all of your eggs in one basket,” he says. This approach means if something happens with one financial institution, companies won't suddenly find themselves completely without funds.

When Is It Too Late?

Is there a point at which it doesn't make sense to deal with a crisis? For Engstrom, this decision is all about cash flow and dealing fairly with employees. "As a risk consultant, if you were to say, what are my parameters [for not dealing with a crisis], it would be when you have 30 days of payroll left. The last thing you want to do is to have to tell an employee that you cannot pay their payroll, with less than a month's notice. That's the most painful thing."

Engstrom adds that once you know you don't have enough funds left to continue the business, it's best to come clean. " The last thing you want to do is hide it. You'll lose credibility, you'll lose respect from everyone you had a relationship with and potentially trigger more aggressive actions against you."

He says: "Communicate your choice to employees, creditors, landlords, suppliers and the like. Ideally you have enough to satisfy your debts, but if you don't, you'll likely need to file for bankruptcy protection and I suggest you obtain a lawyer to discuss once you've prepared a financial statement and know what can and can't happen."

While handling a crisis can tax business owners to the limit, there is one piece of good news. According to the PwC survey, 42% of companies emerge stronger after weathering a crisis, and they’re better prepared  for the next one they’ll face. 

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