Cindie Jamison

Plan for the Worst in 2009 and the Best May Happen Four innovative techniques show you how. January 26, 2009 by Cindie Jamison, CPA

In these very strange and challenging times all companies are struggling 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 is very 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 completely 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.

Four Innovative Solutions

Here’s an innovative technique that includes four approaches that work together to redefine the process.

1. Create at least two budgets. This is especially true if you have any bank debt or financial instruments attached to financial performance covenants. The “bank budget” should be so conservative that there is literally no chance of missing it. Come as close as you can to existing covenant parameters while assuming a worst-case revenue scenario. Submit this budget only to external parties with an element of control over your access to liquidity. Do not share it otherwise. The point of this is simply to alleviate stress or concern throughout next year around access to liquidity.
   
   With that worry eased, create and distribute internally a real, living budget that is minimally optimistic for 2009 and use this one as the compass for managing the business throughout the year.
2. Keep the “real” budget flexible. Set expectations that throughout 2009 this budget will be reviewed and changed quarterly, depending on business results. Anticipate a bigger percentage of your time next year to re-plan and update your forecast, and allocate time to lead this process. Since cash forecasting is particularly important at this time, it is smart to link your 13-week cash-flow forecast directly with your planning activities throughout the year so that U.S. GAAP (Generally Accepted Accounting Principles) accounting and cash accounting can integrate seamlessly.
3. 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 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. Make sure that you understand the elements of your core business in detail, so that you can forecast accurately and conservatively to maximize the probability of hitting the numbers.
4. 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 as recommended here. 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.

Cause and Effect

Using these four techniques guarantees a maximum potential for surprisingly GOOD results. Imagine for example that the budget submitted to the bank exempts you from any concern about access to funds. Additionally, you plan your operating budget conservatively using known factors and adjust it as needed throughout the year to reflect new reports. In addition, suppose you succeed in hitting your numbers (or beating them) by the end of next year. Assume also that your competitor’s have not been as savvy in planning and have either miscalculated key items or led the street to expect different results.

Result? Nothing but net! The management team enters the year feeling secure that the budget has a reasonable chance of being attained. As the year progresses — and each new piece of information is reflected — your management team gains a sense of empowerment and confidence to fuel their continued efforts. They can track their quarterly performance easily against competitors and can anticipate what incentive payouts are achievable. Confidence is re-built, reward payments are on the horizon and the sense of danger — so palpable right now — recedes as the year draws to a close. There is a strong sense of accomplishment and pride. Nothing can be better than this as a goal for corporate culture at the end of next year!

Conclusion

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.

Cindie Jamison,CPA, is National Director of CFO Services for Tatum, the only national executive services firm focused exclusively on supporting the Office of the CFO. Her 25 year career includes serving as CFO for 7 companies, both public and private. She has served on the Board of Directors of multiple companies and currently acts as Chairman of the Audit Committee for two publicly traded organizations. Jamison’s unique perspective as a veteran CFO who provides leadership to more than 500 Tatum CFO Partners has made her a nationally regarded expert on the role of the CFO who has been featured in such publications as Fortune, CFO magazine, the Wall Street Journal and Newsweek.