Credit Matters Blog

Surviving a Business Minsky Moment

Kim Radok 12 April 2019

A Minsky moment is a sudden, major collapse of asset values which generates a credit cycle or business cycle. The rapid instability occurs because long periods of steady prosperity and investment gains encourage a diminished perception of overall market risk, which promotes the leveraged risk of investing borrowed money instead of cash.  Wikipedia

Whilst a Minsky moment was conceived for the financial environment, the same principle also applies in business. A change in economic conditions, a major event, or an unforeseen problem can occur and a business, or businessperson may experience their own Minsky moment.

History shows us that the most successful long-term businesses and businesspeople are those which have not been successful all the time. It is recognised that long-term success is often founded on luck, survival and how setbacks and crises were managed.

Those businesses and businesspeople which have not experienced some form of setback or crisis and survived, are less likely to succeed over the long term, especially when they experience their own Minsky moment.

A typical business Minsky moment may be:

(i) loss of reputation due to an exposure of a political, economic or social event;

(ii) loss of a major client through their decision to buy elsewhere, or in the event of an insolvency administrator being appointed;

(iii) discovering fraud has compromised the reputation and financial wellbeing of the business;

(iv) withdrawal of an investor or finance provider;

(v) the level of debt and repayments are in excess of a business’s capacity to pay;

(vi) failure to collect monies owed from outstanding invoices in a timely and efficient manner;

(vii) a downturn or recession and the loss of profitable customers, etc.

Today, it is said, we have been operating in a period of time in which many businesses and businesspeople have never experienced a serious downturn or a recession. In addition, these same entities are also unlikely to have prepared to survive the next downturn or recession, with the required business structures, strategies, employees and financial resources.

Consequently, in the event that a downturn or recession does eventuate, these businesses and businesspeople are at a disadvantage when trying to help their business survive. Even if their business does survive, it is unlikely they will be in a position to take advantage of unforeseen opportunities.

History shows us, that amongst the misery of others, there will always be opportunities to seek major benefits and profits for those who are prepared. These unforeseen opportunities however are only available for those with the means to take advantage of them. Meanwhile, others which are battling for their very survival, will miss out.

A business or businessperson which has never confronted their own Minsky moment and survived the experience, is an untested proposition when times become more difficult. In such business environments therefore, if they fail, it is their stakeholders and suppliers which are the first to suffer.

Studying the dynamics of their stakeholders and of their own organisation, is a critical factor in the survival of every business and businessperson. At the end of the day and at some stage of our business lives, we will all be confronted by our own Minsky moment. It is how we deal with this moment which will dictate whether our business dies, survives, or goes on to achieve a better future.