Profit Planning in an Uncertain Economy
In my work with business owners, a priority is to ensure that they have a profit plan, which includes an operating budget, capital budget, and cash flow forecast for their company. It makes sense that a profit plan would be data based and as realistic as possible. But it’s not wise to ignore what might need to change with best- and worst-case scenarios.
Facing Economic Unknowns
In the current economy, we are faced with unknowns we haven’t seen for about the past ten years, during which we’ve been operating in a growth economy. Circumstances can change quickly so it’s more important than ever to have contingency plans in place – both optimistic and pessimistic.
If you were able to read the tea leaves and decipher how your company might be impacted if the economy improves, how would your needs and financial forecasting change? Would you need more salespeople, customer service staff, or the ability to increase production? How would you quickly boost the cash flow you’d need to fund additional costs associated with increased business?
If there’s a downturn and business doesn’t support your existing staff, do you know which positions you could do without? Will cuts eliminate positions or make them part-time? Can you retain the commitment of employees you want to call back when business improves? What other costs would need to be reduced? Do you know your break-even point for revenues? How will an economic downward turn change your forecast?
An Alternative to Traditional Profit Planning
Realistic, optimistic, and pessimistic versions of your profit plan make sense so that you’re prepared – no matter what. But creating three different renditions of this complex, but necessary, financial tool is a daunting task.
A far less time-consuming solution is a rolling, 12-month, profit plan. It delivers an accurate picture of where you stand, even if and as the economy fluctuates.
The rolling profit plan looks at your key indicators each quarter and provides you with the data you need to adjust as necessary. Agility to pivot is built into this type of profit plan. It’s always based on the realities of the economy and enables you to be more proactive than reactive. Potential changes are anticipated and thought through, becoming much less emotionally charged if/when you have to implement them than if you are operating in “crisis mode.”
The rolling, 12-month, profit plan looks quarterly at what has and is happening and therefore equips your business to accurately gauge what you expect to happen and factor that into your forecasting. As a result, your profit plan will always be more accurate than a traditional, annual, calendar year profit plan.
When you rely on an annual profit plan, typically developed in the fourth quarter of the preceding year, you may be operating based on forecasts that were made as far out as 15 months. In contrast, a rolling, 12-month plan always provides you with forecasts and a plan for a full year, updated quarterly with real-time data.
Tips for Creating a Rolling, 12-Month, Profit Plan
The basics are the same as a traditional profit plan. So, start where you are but change your pace.
- Watch the key performance and key operational indicators for your business quarterly as you go. This keeps you connected to what’s really happening.
- Learn the key indicators you should monitor outside your business to keep tabs on the economy in general and within your industry. This will give you an indication of where your business needs to be and enables you to forecast realistically, optimistically, and pessimistically – and eliminate surprises.
- Watch standard indicators such as the performance of the stock market and banks.
- Determine what triggers would cause you to change your course of action, in either an optimistic or pessimistic direction.
- Ask yourself “if… then….” questions. What are you going to do within your business if you see certain indicators? Answer those questions and plan accordingly. This includes determining whether changes you see coming may put you at a disadvantage or provide an opportunity for growth.
- Reassess your infrastructure needs quarterly.
- Ask yourself whether your business is on course or needs to pivot. If you need to pivot, what do you need to do?
- Make any adjustments indicated for the next four quarters and re-forecast as necessary.
I transitioned to a rolling, 12-month, profit plan after experiencing the shortfalls of an annual profit plan in my own business and have never looked back. Since none of us has a crystal ball, we need real, current data on which to base important decisions.
I’d welcome the opportunity to help you transition to this invaluable planning tool, trading the exhaustive, and oftentimes inaccurate, process of annual planning for a more efficient and effective profit plan. There’s tremendous value in having the built-in ability to adjust and accurately forecast every quarter, while always looking one year out. Contact me for a complimentary consultation.
