by Tim Berry, President, Palo Alto Software, Inc.
..............................................................................................................................1
Why Plan on Slowdown?.........................................................................................2
The More Obvious Changes ...................................................................................2
Planning with Alternate Scenarios...........................................................................2
Save Alternate Plans as Scenarios........................................................................3
Two Sales Scenarios are Built In ........................................................................3
Use the Actual Area as an Alternate Scenario......................................................3
Ongoing Companies and the Benchmarks Chart.................................................5
Better Budget Management with Plan vs. Actual....................................................6
Use the Actual Setting for Revised Budget..........................................................7
Detailed Review for Slowdown.............................................................................11
General Assumptions.........................................................................................11
Break-even Analysis..........................................................................................12
Market Analysis.................................................................................................13
Sales Forecast.....................................................................................................14
Personnel Plan....................................................................................................14
Impact on Sales Commission.........................................................................15
Profit and Loss...................................................................................................15
Make an Expense a Percent of Sales..............................................................15
Taxes..............................................................................................................16
Start-up Cash Requirements..............................................................................16
How to Calculate Cash Requirements...........................................................16
Cash Flow..........................................................................................................17
The ‘Profits vs. Cash’ Problem......................................................................17
Cash-Sensitive Assumptions .........................................................................18
Milestones..........................................................................................................18
................................................................................................................................20
Managing Plan vs. Actual and Variance................................................................20
Input Logic Changes for Actual.........................................................................20
Variance (Plan-vs. -Actual) is Automatic...........................................................21
Conclusion: Planning is About Results..................................................................21
Why Plan on Slowdown?
Slowdown isn’t the goal or objective, of course, it’s an environmental
assumption. A good plan interprets the external environment.
Here are a few good reasons to plan for a slowdown, with apologies
for the obvious:
1. Because you may not have a choice. You have a business; you
want to keep it healthy, you need to plan for it. You want to
start 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, but
several experts are. So let’s talk about it.
3. Business does go up and down. Cycles are part of life and part
of 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.
• Employees stick with jobs longer, or stick less.
• Interest rates go down as the Federal Government attempts to fight
a recession, but for many smaller businesses the banks slide small
business loan rates up, not down. If you were paying one point
over prime, you can end up paying two points.
Planning with Alternate Scenarios
Business Plan Pro gives you several options for plan management, so
you can develop a pessimistic (or more realistic) version of your plan that
projects the way your business would look in different economic
scenarios. One of the best things you can do is develop contingency plans
as scenario plans.
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Save Alternate Plans as Scenarios
One simple way to do this is to take your latest business plan, from
within Business Plan Pro, and use the Save As command to create a copy
with a different name. Then go into that plan and change these
assumptions 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 the
numbers to fit the different assumptions. You could name alternate plans
“optimistic”, “pessimistic”, and “most likely”, for example. You can
certainly 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-based
forecast. When you change this setting in the Plan Wizard, you switch
between two independent forecasts; each sets the sales forecast for the rest
of 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 profit
and loss and cash flow tables.
If you’d like to copy and paste from one forecast to the other, you need
to be aware of the difference between the two. For example, if you go
from units-based to value-based, copy the “value” portion of your units
sales forecast, then use the Paste Special/Values command from the edit
menu, 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, create
your plan like you normally would, with the Table menu set to Plan.
Then, use the Actual setting on the Table menu, and type alternate
assumptions into the Actual table as if they were actual results. This
method gives you a detailed comparison (in the Variance area) of the
difference between your “plan” vs. “actual” tables.
To put an alternate scenario into the Actual area of the plan, and use
the variance analysis to compare the scenarios, here is what you would do:
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1. Save your main plan with an alternate name (as previously
explained) so that you can preserve your original plan.
2. Go to the Table menu and select Actual instead of Plan.
3. When set for Actual view, you have Sales, Profit and Loss,
Balance Sheet, and Cash Flow tables only.
4. The Sales Forecast in Actual view comes first. The logic is
different from the plan view because you have units and sales
as inputs, and the software calculates unit prices. You have
cost of sales as an input, and the software calculates per–unit
cost. Work with that, and develop a second sales forecast
(either optimistic or pessimistic) in the Actual sales.
5. Move to the Profit and Loss table within the Actual view. Use
the P and L to gauge the impact of the different sales level.
Until you type new numbers in, the Actual P & L view shows
expenses exactly as you planned them, but with the different
sales numbers. Use the table to make changes in expenses to
react to the changed sales forecast. How does the alternate
sales forecast affect your expenses and profits, or loss?
6. Move to the Balance Sheet table, in Actual view. Estimate
Accounts Receivable, Inventory, and Accounts Payable by
typing your estimates directly into the green (unprotected)
areas of the Actual Balance sheet. To help you estimate, note
that the original estimates are showing, before you type into
those areas. You can make these balance items relate to the
scenario by adjusting them according to your Sales Forecast
and expenses in the changed scenario. For example, if your
sales are less than the main plan, then your Accounts
Receivable and Inventory should logically decrease in
proportion.
7. Move to the Cash Flow table, in Actual view. Adjust your cash
projection for the new scenario. You will be able to make
changes in the rows for loans, new capital, etc., just as when
the Table is set for Plan.
The result of this work is a second scenario, within the same Business
Plan. You can then move to the Variance view in the Table menu to
compare the two. Each variance table will show you the difference
between the main scenario in the Plan setting and the alternate scenario in
the Actual setting.
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Ongoing Companies and the Benchmarks Chart
The Benchmarks Chart shows comparative or relative values for five
critical business variables: sales, gross margin, operating expenses,
inventory turnover, and collection days. The benchmarks chart for ongoing
companies goes back three years, so you can view changes over time.
Figure 1 shows an example.
Figure 1: Benchmarks for Ongoing Companies
The Benchmarks Chart uses index values to compare different
numbers. Specifically, sales and operating expenses are measured in
currency value (usually dollars), while gross margin is a percent,
collection days (the chart calls it AR for Accounts Receivable) are
measured in days, and inventory turnover is measured as a number.
The index values compare changes in the numbers as relative values.
The last full year, the last column in Past Performance, is always set to 1,
and the other years, past and future, are shown as values relative to 1. The
bars show relative change, not absolute values.
Take sales first, to explain. In the example shown, sales in 2000 were
$5.3 million. Sales for 1998 were $3.8 million, so the red bar in the chart
shows up as less than one, about 70%. Actually, 3.8/5.3 = .72, which is
about what the red bar shows. The light blue bar in sales for the year 2003
is clearly between two and three, so sales for that year are more than
double the $5.3 million from 2000. In the sample plan, the estimate is
$12.2 million for 2003, which is 2.3*$5.3 million.
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Then take gross margin, which is expressed as percent. In the sample
plan, the gross margin for 2000 was 21.3%. The chart shows the decline
from 31.4% in 1998 (displayed as about 1.5 times the index value of 1 for
2000, and then the projected increase back to 29% in 2001, 24% in 2002,
and 26% in 2003. You can see the chart showing relative values. Sales are
in millions of dollars, and gross margin in percentages, but we can
compare the relative level of change for both factors over time.
If you’re planning for recession, see how this impacts the benchmarks.
Sales growth slows, gross margin tends to decline slightly, operating
expenses vary with sales, collection days tend upwards, and inventory
turnover tends downwards. Look at the Benchmarks to see whether your
revised plan shows these trends. Do you have some good reasons why
not?
Better Budget Management with Plan vs. Actual
The plan-vs. -actual facility in Business Plan Pro is intended to
simplify management. It should facilitate and encourage budget follow-
up. Figure 1 shows the variance view of Sales Forecast for an example
plan. The view is taken after the close of the March financials.
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Figure 1: Disappointing Actual Sales
The sales variance is Actual less Plan, so the numbers showing in red
are negative variances, amounts in which the actual sales were less than
planned. Business Plan Pro calculates the variance automatically, taking
Actual less Plan for sales items and Plan less Actual for cost and expense
items. First, of course, after the close of the books for each month, an
accounting clerk set the Table menu for Actual instead of Plan, and typed
the summarized financial results into the Actual view.
This is definitely not a good sales picture for the company shown. The
red numbers are sales results below the plan, so that total sales in the
bottom row are $73,503, $104,198, and $130,661 below plan.
Use the Actual Setting for Revised Budget
The problem at this point is revising budgets. Do you revise your
plan, and lose the tracking of plan vs. actual? Do you stick to your original
budget? No, you use Business Plan Pro’s Actual setting, in the Table
menu, to keep a revised budget and modify that budget month by month to
deal with a changing business. Figure 2 shows a view of the Profit and
Loss Table in Actual mode.
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Figure 2: Actual Profit and Loss
In Figure 2, the table is showing actual numbers through March only.
April and all following months still show the original numbers from the
Plan area. That’s because the Actual mode is set to show plan numbers
until other numbers are typed over them.
Figure 3 shows the Variance Profit and Loss. Sales are down from the
level in the plan, but expenses haven’t fallen in proportion, so the financial
situation is considerably worse than planned.
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Figure 3: Variance Profit and Loss
With Actual results going back into the plan month by month as the
year runs on, the Actual Profit and Loss table is a good tool for keeping a
revised budget. You can also use this Actual view to revise budgets for
oncoming months without changing them in the main plan. In the table
shown in Figure 2, for example, you can reduce expenses for April, May,
and June to lower them in proportion to the lower sales results from
January through March. Figure 4 shows a hypothetical revised budget
using the Actual view for the same situation shown in Figures 1-3.
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Figure 4: Revised Budget in Actual
This revised budget is different from the original because it now holds
salaries steady instead of increasing, and changes some sales and
marketing expenses to react to the sales problems. Not all of the revised
expenses go down, however, because this company wants to improve
sales, and looks at some strategic sales and marketing expenses.
It may be hard to see the changes in Actual view shown in Figure 4.
Part of the reason for the Variance setting is to see such changes easily.
Therefore, the Variance for this revised scenario is in Figure 5, in which
the differences are easy to see.
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Figure 5: Variance in Revised Budget
In this last illustration, you can see how the revisions were made for
the April and May months, even before they happened. The revised
budget calls for lower sales, lower cost of sales, lower payroll expenses,
and higher expenses for mailings that are intended to increase sales. Even
though the books are only closed through March, the company shown is
already managing to maintain financial health despite changed sales
numbers.
Detailed Review for Slowdown
General Assumptions
Figure 6 shows the General Assumptions table within Business Plan
Pro. Consider the adjustments you might have to make for a downturn.
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Figure 6: General Assumptions
1. Interest rates may change. Your interest on variable rate
schedules may go down if it shifts with prime or is pegged to
some other major indicator; but banks will be likely to raise
some small business lending rates.
2. You’re likely to increase your payment days. Most businesses
do that. You’ll be holding payments longer to help with your
cash.
3. Your customers are likely to increase collection days.
Remember, the collection days row has a single cell available
for data entry, in the first month, and then just annual cells
thereafter. Business Plan Pro does that because collection
days, as a business variable, are almost impossible to control
from month to month. Major changes in policy and major
economic shifts will have impact, but over a longer period. So
we allow input for the years only, and the first month is the
input for the first year. If you’re planning for recession, assume
the worst with collection days.
Break-even Analysis
Figure 7 shows the break-even analysis included in Business Plan Pro.
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Figure 7: Break-even Analysis
The break-even calculations don’t necessarily change, but the inputs
might. Does a downturn impact price? Yes, frequently. Because of the
discounts imposed by competitors, your per-unit revenue might go down.
Also, many companies look for ways to reduce their fixed cost.
In addition, the recession is where you see why fixed costs are
important. When you want to reduce costs because sales are down, the
fixed costs are the hardest to reduce. When the economy is slow,
companies prefer to trade fixed costs for per-unit variable costs.
Market Analysis
Figure 8 shows Business Plan Pro’s Market Analysis. Normally this is
total potential market, not total actual customers. Expect market growth
rates to slow in a recession. You should probably lower the growth
assumption percent in column B.
Figure 8: Market Analysis
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As an alternative, however, you can assume the underlying market
continues to grow in potential even if the short-term market sales don’t.
Remember, with the way the Market Analysis is structured, you don’t
necessarily change the endpoints of your forecast, you might slow growth
in the immediate years and assume faster growth later on, to get to the
same point. To do that, first copy the ending numbers in the final column
(with the copy command in your Edit menu), and then paste them back
into the same cells with the Paste Special command as values only. That
takes the formula out of the final green column, so you can fill in
intervening values by typing them into assumptions, without changing the
long-term growth rate. Figure 9 shows how the same endpoint can result
from two radically different forecasts.
Figure 9: The Market Contrast
Sales Forecast
The Sales Forecast is the most obvious first victim of the recession.
Sales go down. If your plan is already there, then you need to adjust it. If
you are still working on it, you need to review your sales forecast for
realism.
Personnel Plan
The personnel plan is less likely to show a great deal of change in a
normal company not impacted by large turnover. Your company personnel
policies continue, although you may find your people more likely to stay
in their jobs. Do you project lower increases in salary and compensation?
Some companies do.
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Impact on Sales Commission
Figure 10 suggests a powerful way to handle commission-based
compensation, which is one hidden factor that tends to change in a
downturn. Sales commissions tend to go down in value as sales go down,
but many companies will turn the commission rate up when sales go
down. That may seem illogical, but companies that look to the long-term
need to keep good salespeople through a recession. If the sales go down
for underlying market reasons, sales compensation goes down. Raising
commission rates helps keep the good people and also offers an incentive
for working harder for each sale.
Figure 10: Setting Commissions for Personnel
Profit and Loss
Scenarios are particularly important in Profit and Loss, because this
table adjusts expenses when sales go down. Take a good look at how
you’d react to lower sales without hurting your underlying business.
Make an Expense a Percent of Sales
Figure 11 shows another common use of named variables in formulas,
as the Business Plan Pro Profit and Loss table sets an expense to be a
percent of sales. The formula shows in the illustration. The percent rate is
set as a variable in column B, and all the cells in the row apply that
percentage to the named variable “Sales.” There is a list of more than 100
named variables included in the Advanced Table Programming Help from
your Help menu.
15
Figure 11: Expense as Percent of Sales
Taxes
Remember, Business Plan Pro handles taxes as simple mathematics,
multiplying your assumed tax rate times the pre-tax profit without regards
for graduated rates, losses, or special circumstances.
If you have steady losses, use the General Assumptions table to set
your tax rate back to zero. Otherwise you’ll be painting an unrealistically
positive picture of your financials.
Start-up Cash Requirements
If you are planning for a start-up company during a downturn, make
sure you have enough cash to cover your early months. If you are selling
to businesses on credit terms, don’t underestimate Collection Days,
because that will have major impact on your cash. Raise more money than
you think you need, so you’ll have working capital to cover the problem
areas.
How to Calculate Cash Requirements
Cash Requirements is a simple estimate of how much money your
start-up company needs to have in its checking account when it starts. Of
course you don’t automatically know how much that is, and you can’t
calculate it by using just the start-up table either. Here’s a step-by-step
way to estimate the amount you need in starting cash:
1. Fill in your start-up table with estimates, based on what you
know about your business, what you can find out from team
members, and what you can find out through business research.
2. Fill in your initial estimates for Sales Forecast, Personnel Plan,
and Expenses in Profit and Loss.
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3. Look at your Cash Flow table. Expect the cash balance to go
into negative numbers. Find out the maximum negative
balance for the first year. Write that number down, or
remember it.
4. Go back into your start-up table and add enough additional
cash to make that negative balance in Cash Flow turn positive.
That’s a much better estimate of cash requirements than your
original estimate.
5. As you work with your plan from then on, changing estimates
for any of the related tables, remember to go back to your start-
up requirements to add cash as needed to keep the first year’s
cash balance positive.
Cash Flow
Cash is the critical core of Business Plan Pro financials. Furthermore,
cash flow, unlike profit or loss, is simply not intuitive. Business Plan Pro
is built around a powerful cash flow model that deserves detailed
explanation. This is by far the most important financial analysis in
Business Plan Pro.
The ‘Profits vs. Cash’ Problem
Several of the most important elements of the Business Plan Pro cash
model are explained in detail in the “Cash is King” chapter of the Hurdle
book (that’s Hurdle: the Book on Business Planning), which accompanies
the product. The physical book is included in the box, and an Adobe
Acrobat PDF (Portable Document Format) version is included with
download. The book is also available for free online, in its entirety, at
http://www.hurdlebook.com/.) This document doesn’t intend to substitute
for that detailed explanation. You should read that chapter in detail.
There are critical points here that you must understand. They can’t be
ignored:
• “Cash” in a business plan isn’t bills and coins; it’s checking
account balance. It includes liquid securities. It is the most vital
resource in your business.
• Changes in balance items can have a huge impact on your cash
flow. Companies do go broke while making profits. If all your
cash is in inventory and accounts receivable, for example, you can
be broke and profitable at the same time.
• Concretely, although the following rules don’t make sense in every
case, with the way the numbers work, accept these rules:
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Every dollar of increase in your accounts receivable means
one dollar less of cash. If you don’t believe that, pull a
dollar out of your wallet and loan it to a friend.
Every dollar of increase in accounts payable means an
additional dollar of cash. If you don’t believe that, pay a
dollar less of your bills than you otherwise would have.
You’ll have an extra dollar in payables, and an extra dollar
in cash.
Every dollar of increase in inventory means a dollar less of
cash. Sure, that can be cancelled by a dollar of increase in
accounts payable, but you get the point.
How can this be? Simple logic. The cash
flow table starts with net income. The
income statement assumes that you paid for
all your costs and expenses, and you
received all of your sales, because it ignores
balance sheet items such as accounts
receivable or payable. Therefore, the
changes in balance items mean changes in
cash.
Cash-Sensitive Assumptions
The cash projections of a normal business depend especially on three
key factors:
• Receivables, which Business Plan Pro estimates using the
collection days, sales, and sales on credit assumptions.
• Inventory, which Business Plan Pro estimates using your inventory
turnover assumption and your assumed cost of sales.
• Payables, which Business Plan Pro estimates using your payment
days estimator assumption, plus expenses, cost of sales, and your
payables percent assumption.
What’s important here is to remember that these may well change in a
downturn or slowdown situation, so you want to plan for those changes.
Will you receive payments from business customers more slowly than
normal? Will your inventory stock up? Will you pay your own bills slower
than normal? These are questions you should be asking.
Milestones
The Milestones Table is one of the most important in your business
plan. It sets the plan into practical, concrete terms, with real budgets,
deadlines, and management responsibilities.
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The Milestones table is the only Business Plan Pro table that sorts.
This sorting is intended to enhance management. Figure 12 shows the
Milestones table highlighting its facility to sort milestones by different
columns.
Figure 12: Sorting the Milestones Table
Figure 13 shows the Milestones Table in its Variance mode, which
compares actual results to the original plan. Variance mode in the
Milestones table can be useful in identifying problem areas. In the
example, the plan is only a few weeks old, so there is only variance for the
first few weeks. You can see in the illustration how some projects started
late, some finished late and some finished early, some were over budget,
and some were under budget.
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Figure 13: Milestones Plan vs. Actual is Variance
Managing Plan vs. Actual and Variance
Of course we’ve already discussed how to use revised budgets in the
Actual area, and how to manage plan vs. actual for milestones. Business
Plan Pro is built on purpose with Plan vs. Actual analysis included, so that
it can be a tool for ongoing management of your business.
Input Logic Changes for Actual
In several tables the input logic changes for actual results. Follow the
indication of green vs. black cell color to see where inputs are expected.
For example:
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• The Sales Forecast inputs change for actual to accommodate the
way most companies manage information. In the plan area, in the
units forecast option, Business Plan Pro assumes forecasting is
easier when projecting units first, then price per units, and
calculating sales as units * price. In the Actual mode, however, the
inputs are total sales in value, and total units. Business Plan Pro
calculates average unit price by dividing the sales by units. This
matches the way information is available.
• The Balance Sheet opens up several critical balance items for
direct input. These include Accounts Receivable (if there are sales
on credit), Inventory (if there is inventory), and Accounts Payable.
These are typed in as inputs rather than calculated.
• For other items, such as other assets and liabilities, the Balance
Sheet and Cash Flow tables interact in actual results like they do
for plan input, with the amount of changes going into the cash flow
first and the Balance Sheet adjusting automatically.
Variance (Plan-vs. -Actual) is Automatic
Variance (plan-vs. –actual) results is entirely automatic. Business
Plan Pro calculates all of the variances from plan and actual results.
Variances do go in different directions. For positive items (including
sales and profits) actual results that are more than planned results show as
a positive variance, and results that are less than planned show as a
negative. For negative items (including costs and expenses), actual results
that are more than planned show as a negative variance, and results that
are less than planned show as a positive variance.
Conclusion: Planning is About Results
As always, business planning is worth the implementation it requires.
It’s about results. Whether you are dealing with downturn or slowdown or
not, the plan is a way to manage the ongoing flow of the business and
make sure that the results are satisfactory. This may be even more
important in slowdown that growth, because the stakes are higher. Losing
growth opportunities can make your company less than optimal, but losing
control during slowdown can make your company cease to exist.
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