Stage 4: Initial Diagnosis
An initial diagnosis identifies the most immediate causes of financial distress. Knowing the causes will help the recovery leader select the most appropriate fiscal first aid techniques.
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- Look for recovery leverage
- Engage others in the diagnosis
- Forecasting is essential
- Develop a financial health model
- Fiscal health model example
Throughout the diagnosis, the recovery leader should look for the problems that have the most recovery leverage. These are problems that:
- Can be solved or mitigated for a reasonable investment
- Offer a significant return on that investment
- Will provide a return soon enough to help stabilize situation in the short term.
The diagnosis may also reveal problems that demand longer-term solutions, without near-term payoffs. These findings can be held until later in the recovery process.
Involving others in conducting the diagnosis brings additional perspectives into the process. Employees often have good ideas about where the problems lie and how to deal with them.
Involvement can also relieve some of the unease associated with the recovery process. It removes some of the mystery around the process and promotes the sense of doing something about the situation.
Finally, involving others creates a deeper and broader recognition of the problems faced. This can help increase support for strategies to address those problems.
A forecast provides a long-term picture of financial condition. A revenue and expenditure forecast will reinforce recognition of the problem. A credible forecast will also foster a common definition of the problem and help participants in the recovery process better gauge the size of the problem that must be overcome.
The diagnosis will be much better if it is guided by an explicit financial health model. A good model:
- Guides the diagnosis so that it is complete
- Gives stakeholders confidence that the diagnosis is thorough
- Resonates with a broad audience, not just financial experts
- Often uses a metaphor to convey meaning
- Often focuses on the fundamentals. In distressed situations, there are often opportunities in the fundamentals. It also helps engage and educate non-experts.
Below is an example of a financial health model which is likened to the foundation and legs of a stool. Each major element of a fiscal health model should be supported by detailed diagnostic issues and questions.
The GFOA has provided you a complete illustration of this particular fiscal health model.