Productive Planning | In a tough economy, preparing for the worst can procure the best gains
In these very strange and challenging times, every company struggles with budgeting for 2009. With so many unknowns, unprecedented macro-economic reactions to government activity and a high level of fear pervading market dynamics, it can become all too easy to put your head in the sand and budget along historical patterns.
There is a high degree of risk in this approach, however, and companies that do so may inadvertently extend the duration of maximum uncertainty. Instead, consider a new approach to planning for 2009, one that carries with it the potential to shorten the period of uncertainty, reward real performance and settle the collective psyche of your organization.
This innovative technique includes four approaches that all work together to redefine the process and provides a strong potential for surprisingly good results.
Create at least two budgets. This is particularly important if you have any bank debt or financial instruments attached to performance covenants. The “bank budget” should be so conservative that there is literally no chance of missing it. Submit this budget only to external parties with an element of control over your access to liquidity. The point of this is simply to alleviate stress or concern around access to liquidity throughout next year.
With that worry eased, create and internally distribute a real, living budget that is minimally optimistic for 2009 and use this one as the compass for managing the business throughout the year.
Keep the “real” budget flexible. Set expectations that the 2009 budget will be reviewed and changed quarterly, depending on business results. Anticipate that re-planning and updating your forecast will take a bigger percentage of your time this year, and allocate time to lead the process.
Budget growth only on core business activities and known factors. This is not the year to assume an influx of new customers, expansion into new product lines or wildly optimistic acquisition activity. Rather, it is a time for a rock-solid information flow and hedged bets.
Conduct frank conversations with your key suppliers and customers to understand their intentions with regard to your business and ask for minimum commitments that you can assuredly build into your plans.
De-couple your incentive plans. While internal performance metrics have been a good measure historically to drive incentive dollars, this is very risky for 2009 and made more complicated if the budget changes throughout the year. In this climate, it may make more sense to measure performance against peer company metrics or industry indices.
Especially for public companies, such information is often readily available and can serve as a fair and transparent yardstick to measure your management team’s execution amid the same head winds your competitors are facing.
So, as you plan, think about this innovative approach to reduce uncertainty, create a sense of empowerment, connect pay to clear performance and provide the psychological boost necessary to facilitate recovery. It can make the difference between success in 2009 and a host of less attractive outcomes.
John Kearney is a CFO partner in the New England practice of Tatum LLC of Newton. He can be reached at john.kearney@tatumllc.com.
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