Companies face one or more shocks every year. One shock for one is not the same for another, and for one company such a shock may hit harder than another, but they all have an impact on our economy. It is the impetus behind the shock resilience model and GraydonCreditsafe's shock resistance indicator or resilience indicator.
The basis of shock resilience
During the past decades, normal business has increasingly focused on efficiency. In the wake of that, a financial cutting-edge technology was born, with companies looking for ways to maximise short-term returns on money. From that perspective, it means that the reserves at a company's disposal are totally redundant and therefore redundant if they are not used immediately. In that particular context, financial reserves are like the sock under the mattress, so to speak, that does not yield returns.
To some extent, this is also correct, but redundancy is more than just redundancy. In medical terms and in biology, redundancy refers to something we do not need, but which can be vital. Applied to the human body, for example, we have two lungs and two kidneys, whereas we can survive perfectly well with one. However, nature has favoured us with two copies to give us more chances of survival when one is lost. Herein also lies the basis for the reasoning around shock resistance.
Reserves in the corporate world
Applied to our business world, it is useful to know to what extent a company has surplus reserves, over and above those needed to cover normal operations and normally predictable risks. A typical example of a normally predictable risk is customers not paying their bills. A provision is created for that. It is a form of reserves with a clear purpose and clearly defined risk, which is also predictable to a certain extent.
Anything that falls outside the norm is seen as redundant and thus drained out of the company through the same high-level financial technology. So, on the one hand, a company can be perfectly profitable, solvent and liquid. It may also be highly regarded by shareholders, who receive a generous annual dividend. On the other hand, at the slightest thing that happens outside the normally predictable world, the company may not be able to continue acting autonomously. During COVID-19, and even more so during the aftermath and follow-up shocks, we saw massive examples of this.
The essence of shock resilience
In essence, then, it comes down to looking at redundancy in a different way. Namely not as a redundant reserve, but as a reserve that a company builds up to respond to certain, sudden events. In a quick way, so that long-term continuity is supported. That is redundancy or shock resistance.
To be clear, a company that seems perfectly healthy according to a normal financial analysis can go down the drain due to a sudden shock due to lack of redundancy.
It is this approach that GraydonCreditsafe further developed in the case of the suddenly surfaced corona pandemic, specifically to measure the impact of COVID-19. But just the same reasoning also applies in many other circumstances, and these do not necessarily involve an entire economy. However, there are always circumstances where a sub-population of an economy is hit and ends up in a discontinuity, complete or otherwise. But you will read more about the various shocks we face in a subsequent article.