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