If you have not heard the phrase Fortress Balance Sheet, you probably are taking more risk than you thought. This phrase received prominence in the 2004 JPMorganChase annual report letter to shareholders. Evidently most people ignored the concept and concerns it raised.
You may have heard different versions of the concept. All are geared to the idea that liquidity is crucial and balance sheets should be cleansed of questionable assets so management truly knows the assets they have available to use and the liabilities they must satisfy. These flight to quality or safety companies have much more flexibility strategically. Think of this as access to cash, ability to take advantage of opportunities going forward or having powder to purchase competitors on incredible terms.
Very few people see a rapid return to growth. Most see either a L shaped slow incline, AFTER we hit the bottom of the downturn, or a W shaped projection with some improvement in the next year, flowed by another drop and then growth. If you are in either camp for your strategic planning or risk management process over a very choppy next two years, what are the major strategy level risks you might plan for? Consider the 7 questions below as a common sense approach to improve your present situation.
1. Where could your company be whiplashed from a prolonged slow return to growth or another economic drop?
2. What is the worst thing which could happen to you from either event?
3. How likely is that event to occur within the next two years?
4. What would be your total exposure, and in what areas of your business, if that worst thing happened?
5. How would you quickly and efficiently react if that event occurred?
6. Would you survive that worst event? If yes, how significant would the damages be?
7. What can you do now or in the very near future, to prevent, or at least reduce the possibility to a more prudent level, that chance that worst event will occur?
Once you have done this strategic or facilitated process on the worst risk, repeat the process for what you feel are the next two catastrophic events that have some conceivable likelihood to occur over the next two to three years.
Think of this as a common sense application or test of your present risk management process. Different companies may call this enterprise risk management, ERM, strategic planning, risk assessment, risk management assessment, entire enterprise risk management assessment, operational review, due diligence, or scenario budgeting. When you find the process owner, or create it in your business, dig a little deeper to determine if the process is siloed or departmentalized. This process should involve all units of your business.
After all the company this planning might save is yours. And the opportunities you may create from improving your company’s resources toward moving toward being a fortress balance sheet company may open up some incredible opportunities for you on the companies that have less staying power.