The business landscape today is marked by unprecedented volatility. Economic downturns, geopolitical tensions, technological disruptions, and natural disasters have become the new normal. Consider the example of Covid-19. The pandemic exposed vulnerabilities in the financial foundations of numerous organizations of all forms and dimensions and even drove many to the brink of bankruptcy. Crises like these remind us of the importance of a robust financial structure to ensure business continuity in the face of unforeseen challenges. A resilient financial structure is not only about surviving a crisis; it's about thriving in its aftermath. Businesses with robust financial foundations are better equipped to weather the storm, adapt to new realities and emerge stronger on the other side.

Having established the critical role of a resilient financial structure, let’s examine the core elements that contribute to an organization’s financial fortitude. These elements form the foundation that allows a business to withstand economic challenges and emerge more strongly: -

Risk Management

Businesses that have a structured risk management system and have contingency plans in place for possible disruptions are better prepared to respond to crisis and ensure business continuity. Global Events like Covid-19 Pandemic, Geopolitical Landscape, Government Policies, etc have further underscored the need for a strong risk management system. A very recent example is how the global events in August 2024 have affected businesses and investors globally-Fear of an all-out Iran-Israel Conflict coupled with the Bank of Japan increasing the interest rates and US Recession Fears sent the Global Markets into a frenzy with major indexes record their biggest one-day losses in Nearly Two Years! The US Magnificent 7 losing more then $600 billion in collective market capitalisation whereas Indian Stock Market wiped off ~₹15Lac Crores of Investor Wealth on the same day.

Cash Flow Discipline

Businesses, especially Startups need to get over their obsession with tracking Top-Line Metrics and track their Cash Flow with the same precision. Numerous small-scale businesses that failed during the pandemic did so because of inadequate cash flow management. On the other hand, there were a set of businesses primarily in the Digital and E-commerce space that experienced rapid growth and expansion fuelled by the pandemic-induced surge in demand for ‘low-touch model.’ Yet, as the initial 'COVID-19 Euphoria' subsided, many of these companies encountered challenges in sustaining operations due to depleted cash reserves. A leading Indian Ed-Tech Startup for example, which was once the ‘Blue-Eyed Child’ of the Indian Startup Story went on an acquisition spree during the pandemic era, spent heavily on marketing and expansion is now enduring severe financial challenges.

Resilient Tech Infrastructure

In today’s world businesses, whether it be SaaS companies or traditional Brick & Mortar Stores are getting highly dependent on technology in all aspects of their business. Any tech outage or Cyberattack could completely cripple the business operations. A classic recent example is how the Outage in July,2024, led to Billions of $ in financial losses for many businesses and caused operational disruptions, particularly in sectors like aviation and healthcare. The Market Capitalisation of the security firm due to which the disruption was caused has fallen significantly. Incidents such as these highlight that even the most technologically advanced companies are prone to disruptions. It is important for organisations to put in place an ‘Incident Response Plan’ to minimize the impact of such disruptions.

Prudent Debt Management

In today’s fast paced environment, there is an undeniable allure to chase Top-line metrics like revenue and growth. To finance this growth, debt is one of the most important levers engaged by most companies. While debt financing does provide the flexibility to seize the right opportunities and invest in growth initiatives, a highly leveraged balance sheet is often seen as a ‘Red Flag’ by investors particularly in times of economic downturns. It is important to ensure that the business can regularly service its debt and have a clear repayment roadmap in place to fulfil its obligations. India has witnessed several high-profile corporate failures primarily attributed to poor debt management and the ‘Classic Debt Trap’. This is particularly more relevant in the case of Capital-Intensive Industries such as Real Estate, Infrastructure and Aviation where businesses have gone ‘under the hammer’ to pay off obligations.

Understanding Customer Needs

While adhering strictly to financial best practices is essential, it alone cannot ensure financial resilience. True financial health hinges on a deep understanding and fulfilment of customer demands, as customers are the ‘Bread and Butter’ of any business. As Sam Walton, founder of Walmart famously observed – “There is only one boss. The customer. And he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else.” This statement apt for many real-world examples, a classic one being the case of ‘Nokia.’ Nokia, once a dominant force in the mobile phone industry, experienced a dramatic decline. Nokia was slow to recognize the shift from feature phones to smartphones. The company focused heavily on hardware and underestimated the importance of software and user experience and thereby missed out on the ‘Android Revolution’ in 2010s. As a result, the Market Cap of Nokia has eroded by >90% between year 2000 to 2024.

Having understood the major pillars of a resilient financial structure, the question now arises as to who is responsible for designing and implementing these principles into the business? Is it the sole responsibility of the Finance function and the executive leadership or is it something that each employee needs to be made responsible for?

While Finance function and the Executive Leadership are the primary owners of the financial discipline and risk appetite of the business, a culture of financial prudence needs to be imbibed across the organization to safeguard its’ financial wellbeing & resilience. Initiatives such as educating the employees on Data Security, Fraud Prevention & Compliance Adherence can create a culture of ownership and shared responsibility and empower employees to contribute to financial resilience of the organization.

About the Author

Aseem Sachdeva is a Chartered Accountant and MBA. Aseem has over 20 years of experience in FMCG and e-commerce domain. Combining his experience in building digital businesses with his deep passion, he excels in developing new capabilities and digital ventures, all while maintaining strong financial insight. At present, he is the Senior Vice President with Tata Digital, where he heads the Business Finance function for Commerce and is the Chief Business Officer for Electronics. Previously, he held diverse financial roles at Flipkart, Coca-Cola, and A.F. Ferguson & Co.