When the Going Gets Unpredictable, Smart CEOs Still Make Predictions With Their Operational Management

Written by Carol Coughlin. Posted in Business Leadership

Smart companies typically spend the end of each year planning for the next. But again this year (thanks to the state of our economy), even the smartest business owners have questions that make even simple annual planning anything but typical.

This year, business owners are asking:

     When will the economy recover? 
     How will its return affect my business?
     What is the impact of the new healthcare bill?
     How on earth can I predict what will happen next year when I could not have predicted this year?
     Is planning for 2011 just an exercise in futility?

The truth is that end-of-the-year business planning is no walk in the park. It’s difficult even under the best circumstances. So, we are not apt to allow our clients off the hook even if the economy is making planning extra tough.

To put it bluntly, we always recommend having a plan that includes at least a budget and cash flow projections for the upcoming year – no matter what.

We want our client’s plans to be flexible so they can be used to evaluate a variety of scenarios that may occur as the economy changes (and change, in terms of the economy today, is almost a given!).

But where do you start in developing a operational management plan when the unpredictable is the only thing that’s predictable:

One of the most challenging parts of planning (especially, in the “New Normal” economy) is predicting revenue. While we certainly don’t have crystal ball to tell you how next year will play out, we can offer advice on how to approach revenue prediction. Just be aware that this is more of an art than a science.

Start by looking at current year revenue:

Companies with long-term contracts and predictable business models may find this exercise relatively easy. Begin with your signed contracts and predict monthly revenue from those. We suggest this as your starting point because we prefer to watch your big picture emerge from the more certain details of individual accounts. If you are not in a steady-state, predictable situation, especially if you are a service provider working on a job by job basis, it can easier to make predictions based on most recent patterns.

We also suggest adding two additional components to your revenue forecast – particularly if you own a service company:

1. Predicted revenue from current prospects, adjusted by the probability (your confidence) that the prospect will become a sale.

2. An estimate of accounts/contracts that need “to be found.” These prospects are not on your prospect list – yet. But they represent what your sales department will need to land over and above the contracts you’re currently working on. “To be found” contracts may also correspond to sales targets for the sales people in your company. Note of caution: Since revenue targets set the stage for the rest of your budgeting and needed cash flow, be conservative in your estimates here.

Next, take a look at Cost of Goods/Services:

Predicting cost of goods/services is likely less difficult than predicting revenue. Typically, cost of goods is a percentage of revenue based on historical costs and adjusted for price changes, efficiencies and other current conditions. For some companies, cost of goods/services also includes salaries and benefits associated with certain positions.

Administrative expenses are next. Often, these are evaluated account by account and there is typically more predictability. If your company is established, you can rely on historical trends. But if your company is younger, a bottom-up approach might make more sense.

At this point in the planning process, the components of your budget are complete and it’s time to take a look at the big picture and anticipate cash flow needs:

If your expenses are higher than your projected revenue, you need to ask: How can I generate more revenue and where can I cut or defer expenses?

We also need to ask: How much do we plan to invest in capital equipment, software development or other long-term assets? And, how we will pay down the long-term liabilities?

By asking these types of questions, you are predicting if your company is going to experience any periods of negative cash flow. Factors that affect cash flow include the timing of customer payments, arrangements with your vendors, inventory expenses and expenditures for capital and software development.

From the information you cull, develop a cash flow projection for the coming year so that you can see as clearly as possible if and when financing needs may arise.

Next, look macro and micro and determine if you need two budgets:

The complexity of your budget process will depend on several macro and micro factors. Macro factors include overall economic conditions, the status of your industry and where you are in the life cycle of your business. Micro factors refer to issues that currently exist in your company.

Pending what you see at the macro and micro level, you may decide  to develop two budgets: one that’s conservative and one that’s a bit more aggressive. This is what we typically advocate for in order to ensure our clients are better prepared no matter which way the economy goes.

Finally, do something with your budget – put it to use:

A budget is academic unless it is shared with the appropriate level of management and used to measure against actual results. Additionally, budgets need to be dynamic. Many of the assumptions you will use to develop your budget (and next year’s plan) will be stale the minute the new year begins. So make sure you have a solid process for re-evaluating and re-projecting.

The smartest CEOs know the importance of understanding risk and building in contingencies to offset it. These CEOs try to limit “what they don’t know” by building a plan.  Having a plan for the next year can provide the information needed to seize opportunities and to address problems before they spiral out of control.

And the absolute best time to begin that process is now.


Carol Coughlin

Carol Coughlin founded BottomLine Growth Strategies, Inc., in 2006 as a way for small and medium-sized businesses to access the same high-level financial and operational expertise that gives large companies a distinct advantage. Using her own extensive corporate experience and willingness to sit in the hot seat as a catalyst, Carol helps BottomLine Growth clients climb to the summit of their success.
business-journal brava top-100 spirited-women circle-of-excellence ceos