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by Tim Berry, President, Palo Alto Software, Inc.
..............................................................................................................................1Why Plan on Slowdown? .........................................................................................2The More Obvious Changes ...................................................................................2Planning with Alternate Scenarios ...........................................................................2Save Alternate Plans as Scenarios ........................................................................3Two Sales Scenarios are Built In ........................................................................3Use the Actual Area as an Alternate Scenario ......................................................3Ongoing Companies and the Benchmarks Chart .................................................5Better Budget Management with Plan vs. Actual ....................................................6Use the Actual Setting for Revised Budget ..........................................................7Detailed Review for Slowdown .............................................................................11General Assumptions .........................................................................................11Break-even Analysis ..........................................................................................12Market Analysis .................................................................................................13Sales Forecast .....................................................................................................14Personnel Plan ....................................................................................................14Impact on Sales Commission .........................................................................15Profit and Loss ...................................................................................................15Make an Expense a Percent of Sales ..............................................................15Taxes ..............................................................................................................16Start-up Cash Requirements ..............................................................................16How to Calculate Cash Requirements ...........................................................16Cash Flow ..........................................................................................................17The ‘Profits vs. Cash’ Problem ......................................................................17Cash-Sensitive Assumptions .........................................................................18Milestones ..........................................................................................................18................................................................................................................................20
Managing Plan vs. Actual and Variance ................................................................20Input Logic Changes for Actual .........................................................................20Variance (Plan-vs. -Actual) is Automatic ...........................................................21Conclusion: Planning is About Results ..................................................................21
Why Plan on Slowdown?
Slowdown isn’t the goal or objective, of course, it’s an environmentalassumption. A good plan interprets the external environment.Here are a few good reasons to plan for a slowdown, with apologiesfor the obvious:1.Because you may not have a choice. You have a business; youwant to keep it healthy, you need to plan for it. You want tostart a business; you have to plan for it.2.The United States economy is showing signs of slowdown after an unprecedented decade of growth. We aren’t predicting it, butseveral experts are. So let’s talk about it.3.Business does go up and down. Cycles are part of life and partof business.
The More Obvious Changes
Some of what you plan for in a recession is obvious, but some is not.Here’s a good checklist of change:
•
Sales forecasts slide downwards, because sales are less optimistic.
•
Collection days go up in a recession. If you were running 45 days before, plan on 50 or 55. This can be a serious drain on cash.
•
As sales rates decline, if you don’t change inventory management,and buy more strategically, then inventory turnover goes up.
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Employees stick with jobs longer, or stick less.
•
Interest rates go down as the Federal Government attempts to fighta recession, but for many smaller businesses the banks slide small business loan rates up, not down. If you were paying one pointover prime, you can end up paying two points.
Planning with Alternate Scenarios
Business Plan Pro
gives you several options for plan management, soyou can develop a pessimistic (or more realistic) version of your plan that projects the way your business would look in different economicscenarios. One of the best things you can do is develop contingency plansas scenario plans.2
Save Alternate Plans as Scenarios
One simple way to do this is to take your latest business plan, fromwithin
Business Plan Pro
, and use the Save As command to create a copywith a different name. Then go into that plan and change theseassumptions to suggest the possible impact:
•
Reduce the sales forecast.
•
Adjust your cost of sales and expenses accordingly.
•
Increase the collection days.
•
Consider the possible impact on your cash.It’s better to save the plan under a different name first, then revise thenumbers to fit the different assumptions. You could name alternate plans“optimistic”, “pessimistic”, and “most likely”, for example. You cancertainly post all three scenarios onto liveplan.com for work with your team.
Two Sales Scenarios are Built In
A second scenario is to switch the sales forecast of your current plan,within
Business Plan Pro
, between the units-based and the value-basedforecast. When you change this setting in the Plan Wizard, you switch between two independent forecasts; each sets the sales forecast for the restof your plan.Try it. If you’re using the units-based forecast, switch to the value- based forecast and set some different sales assumptions (presumably lower sales) into that forecast. Then you can explore the impact on your profitand loss and cash flow tables.If you’d like to copy and paste from one forecast to the other, you needto be aware of the difference between the two. For example, if you gofrom units-based to value-based, copy the “value” portion of your unitssales forecast, then use the Paste Special/Values command from the editmenu, to paste it into the alternate sales forecast.
Use the Actual Area as an Alternate Scenario
A third scenario is to use the plan-vs. -actual facility of
Business Plan Pro
to create two complete scenarios within the same plan. First, createyour plan like you normally would, with the Table menu set to Plan.Then, use the Actual setting on the Table menu, and type alternateassumptions into the Actual table as if they were actual results. Thismethod gives you a detailed comparison (in the Variance area) of thedifference between your “plan” vs. “actual” tables.To put an alternate scenario into the Actual area of the plan, and usethe variance analysis to compare the scenarios, here is what you would do:3
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