Writing a Business Plan in a Recession
Writing a business plan in a recession works differently. One needs to take a different approach--one that recognizes the economic landscape. Further, in a recession, one should make a special effort to avoid certain types of errors--because the damage can be so severe.
Fortunately, one can do several simple things to write a better, more realistic business plan in a recession:
Recession Business Planning Idea #1: De-grandiose-ize the Plan
In a frothy economy, one can find it easy to get over-excited about an opportunity or venture. And, in a sense, that's may be good. Excitement, optimism and confidence can be contagious. If the entrepreneur or management team displays, say, excitement and confidence, those feelings can infect--in a good way--the perception of customers, vendors, investors, lenders, and employees.
In recession, however, probably one wants to be more cautious for a couple of reasons: First of all, in a sputtering or shrinking economy, one will have more trouble selling. Period. Customers will have less money for everything. And this "less money for everything" will particularly mean less money for non-essential purchases and services.
A second factor relates to the "less money for everything" issue: With less money, customers will logically take more time and be cautious in their purchasing. In other words, even if some customer does choose ultimately to buy a product, the customer may take six months longer to make the decision.
Recession Business Planning Idea #2: Focus on Cash Operating Profits
In a recession, businesses need to focus their business planning on maximizing cash operating profits.
This admonition sounds, perhaps, a little too obvious. But to make the point here stand out: Many business plans focus too much on the liquidity event... the transaction that allows the entrepreneur to exit the business at some point in the future with a generous financial windfall.
For example, the business plan may focus on doing the things perceived necessary to get to an initial public offering. Or the business plan may optimize some element of the business that in the past, large companies have used to value the small companies they buy. Like top-line revenue or customer counts.
When the economy is good, focusing on these "liquidity event" issues may make sense. Focusing on the "liquidity event" issues when major public corporations need government bailouts to make it through the next week is dumb.
Recession Business Planning Idea #3: Strip Out Geometric Growth Rates
Commonly, in business plans, the people forecasting revenue, profits and cash flow use geometric growth rates. In a good economy, one can often get away with an assumption of geometric growth. Maybe. But geometric growth rates don't make sense in a recession.
A geometric growth rate assumes that some value in the business plan will grow by a certain percentage. For example, the business plan might assume revenues will grow (almost automatically) by 5% a year. Or that inflation will trigger annual (dependable) price adjustments of 3% for the foreseeable future. Or that customer counts will grow (magically) by 10% a year.
Geometric growth rates create exponential growth--and implicitly assume that the business will just always get better and better.
Note: The subprime mortgage meltdown that triggered the current economic crisis stemmed in part from people using geometric growth rates. Investors, lenders and policy makers assumed that home prices would continue to almost automatically, dependably, magically increase...
The alternative to a geometric growth rate is an arithmetic growth rate. With arithmetic growth, you assume that a value grows by a specific value. For example, a retailer assumes that revenues grow by $500,000 each time a new retail location is added.
Arithmetic growth assumptions provide two benefits to the business planner. Arithmetic growth removes exponential growth from the business plan. Arithmetic growth in general makes the business planner explain with more detail what drives growth.
Recession Business Planning Idea #4: Do Serious Scenario Planning
In a recession--particularly in a recession that looks to be as bad and deep as the current one--the business planning process needs to include serious scenario planning.
Scenario planning means redoing the business plan for some crazy, nearly unimaginable event. Like deflation. Or the collapse of an entire industry. Or commodities prices rising or falling to levels not seen in recent history.
Scenario planning delivers two benefits: Thinking the unthinkable should give the entrepreneur the opportunity to avoid some kinds of risks. And thinking the unthinkable--if the worst case occurs--should mean the entrepreneur can more quickly respond to a threat.
A final comment: Scenario planning should not look only at bad scenarios--though that bias may be easy in the current economy. Some of the surprises we see in the coming months will be unimaginably good...
About the author:
CPA Stephen L. Nelson is the author of Maximizing Employee Retention Credits.