High Risk Crises Keep Coming. Can You Afford Them?

Global pandemics. Social uprising. International wars. Mass resignations. Cultural shifts in the workplace.

Over the past few years, we’ve seen a significant amount of change in the world – change that has a direct impact on you, your business, and the people you serve. Such events are known as Black Swan Events – an unexpected occurrence that can have significant impacts and consequences.

Black Swan Events are typically considered to pop up once in a blue moon. But, take one look at the last few years, and one thing is apparent: this is not a matter of ‘if,’ it’s a matter of ‘when.’ So it’s important to be prepared for when they appear again.

Whatever the frequency, the need for a fix remains the same—a focus on financial flexibility must be established now to proactively ensure your organization will be prepped to adapt to both bleak outlooks as well as rising opportunities.

Many are questioning what the overall impact these events will have on the future. Notwithstanding the social, political, and cultural effects, the financial implications pertaining to Black Swan Events can be significant and farther-reaching than anticipated. Couple that with volatility in the market, and the only thing clear about the future is that it’s not clear. It’s at this moment we find it’s smart to get ahead of the issue by planning for various outcomes before they have a chance to become reality.

While we’re hopeful that Black Swan Events will dissipate as quickly as they appear, it’s important to prepare for the worst-case scenario: that they continue popping up and last for a long time. The reality is that, while the decisions you make today may seem to solve the immediate problem, these choices may cost you down the line without knowing it. What is best for today may not be best for tomorrow.

Creating the right discipline around modeling your financial future now will help you mitigate the lack of clarity over the long term and may even uncover unknown impacts you would have otherwise missed.

How Could a Black Swan Event Impact You and Your Organization?

For colleges and universities, this means focusing on enrollment populations: modeling sensitivity around study abroad programs, online programs, international student counts, and changes to on campus housing residency. You may even want to model swings to overall enrollment and tuition, as students may opt not to return to campus, or campuses may shut down altogether. On the expense side, what does compensation looks like if the employee population shifts significantly?

For school districts and local governments, operational hits to the budget should be contemplated – if a state of emergency is declared, what could this mean to the bottom line? Would expenses increase? Would emergency personnel need to be brought in? What could happen to tourism and the hotel industry in your area, and how will that affect taxes?

For utilities and other entities, could such hits on operations lead to service cutbacks? If people are staying home more, could this actually lead to an uptick in service? What about the extreme weather conditions that have become prevalent recently? Depending on where you are and how much your service is weather-dependent, could your demand be negatively affected?

All of the above may be seemingly straightforward, but what about debt, capital, and investments? With supply chain disruption hitting myriad industries, do you need to reevaluate your ability to meet demand with current resources? Is your liquidity high enough to support you through this time? It’s also worth looking into potential recession scenarios and their impact on endowments and investments, especially considering the latest shifts in the market. With interest rates on the rise, has your ability to borrow changed? If so, by how much? Would construction costs need to be delayed if funding can’t be secured? What will this all mean for credit ratings in the long run?

Modeling Through Black Swan Events

Running analyses around potential scenarios is great, but without buy-in, it will be difficult to affect meaningful change in time for the analysis to be useful. However, if you’re able to stress-test your future and relay results back in a uniform language and format, you have a better chance to bring the necessary stakeholders to the table and empower them with the tools to make hard decisions now that will pay off in the long run. Black Swan Events keep popping up and will continue to affect all domains and industries. Whatever your area of expertise is, we recommend getting ahead of the issue now by removing one crucial factor – preparedness for an uncertain financial future.