| A "Contingency Plan" is a plan developed for a | | | | demonstrate credibility in recognition of the |
| specific situation when things "could" go wrong or | | | | possibility that conditions can become much worse |
| are going wrong. Contingency plans include specific | | | | than anticipated. In that event, you are prepared |
| strategies, initiatives and actions designed to deal | | | | to execute according to plan. Your budgeted |
| with identified variances to assumptions. These | | | | revenue becomes a lower number recognizing |
| variances usually result in a particular problem, | | | | economic turbulence; next you calculate your |
| emergency, or state of affairs. The plan also | | | | gross profit dollars. You then take your platform |
| includes a monitoring process and "triggers" for | | | | year's budgeted total expense (without any |
| initiating planned actions. They are required to help | | | | restructuring adjustment) and subtract that from |
| businesses recover from serious incidents or | | | | the gross profit dollars. This shows your resulting |
| economic crisis in the minimum amount of time | | | | pretax loss or profit. |
| with minimum cost and disruption. Contingency | | | | Your objective in making a presentation to your |
| Planning is a management process that identifies | | | | bank should be to convince them that you will end |
| potential impacts that threaten an organization and | | | | the next year with an achievement somewhere |
| provides a framework for building resilience and | | | | between the realistic budget and the optimistic |
| the capability for an effective response and | | | | budget. If your presentation is done well, backed |
| possible recovery if required. Once the initial | | | | up by facts with definitive initiatives and action |
| contingency planning session is complete, | | | | plans, the bank will probably believe that you will |
| ownership must decide exactly who will be part | | | | end the next year somewhere between the |
| of the contingency planning team to execute the | | | | realistic budget and the catastrophic budget. That's |
| plan. An effective contingency plan must be fully | | | | okay because that means you have stopped the |
| integrated into the organization as an embedded | | | | bleeding and will end the year a stronger |
| management process. | | | | company, in control of your destiny and with the |
| Economic Turbulence May Demand Contingency | | | | ability to turn next year into a very profitable |
| Planning | | | | year. |
| Contingency planning is often essential and | | | | THE CATASTROPHIC BUDGET CALCULATION |
| unavoidable during economic turbulence. However, | | | | In calculating your necessary expense reduction |
| the creation of a sound contingency plan is a | | | | and margin improvement, the catastrophic budget |
| complex undertaking, involving a number of | | | | takes your platform year proforma revenue and |
| stages and discrete activities. For example, initially | | | | reduces it according to your forecast. (a 20 - |
| it is necessary to understand the underlying risks | | | | 50% decline) This may vary according to individual |
| and the potential impacts of market decline.... this | | | | circumstance. The idea is to demonstrate |
| becomes the building block upon which a sensible | | | | credibility in recognition of the possibility that |
| business continuity plan must be built. Every | | | | conditions can become exceptionally worse than |
| aspect of the plan must be carefully managed to | | | | anticipated. In that event, you are prepared to |
| ensure that it does not fall short of recovery and | | | | minimize your losses by initiating your catastrophic |
| maintaining the company's stability. | | | | budget. Your budgeted revenue becomes a |
| Ownership must decide exactly who will be part | | | | reduced number from your platform year (based |
| of the contingency planning team to develop and | | | | on economic predictions-this reduction could be |
| execute the plan. Additionally, tactical questions | | | | substantial). Utilizing historical data and |
| & objectives include;o How will meetings be | | | | percentages, you calculate your gross profit |
| run (e.g. pure status reporting up front)o Who will | | | | dollars. You then take your platform year's |
| record the notes, etc.o Frequency and agenda for | | | | budgeted total expense (without any restructuring |
| team meetingso Operating principles while the plan | | | | adjustment) and subtract that from the gross |
| is in effect (e.g. team approval of expenditures | | | | profit dollars. This shows your resulting profit or |
| over $)o How to address accountability and | | | | most likely your resulting pretax loss. |
| progress measurements | | | | Closing the Gap |
| MULTIPLE BUDGETS | | | | The three budgets indicate exactly how much |
| The platform for contingency planning due to a | | | | cost reduction will be necessary to meet specific |
| financial crisis is the multiple budget process. This | | | | profit objectives established for each budget. The |
| contingency budgeting process is survival action | | | | catastrophic budget may actually acknowledge a |
| planning and should not be taken lightly. It should | | | | forecasted loss or break-even at best. Now it's |
| not be entered into with a haphazard approach. | | | | time to close the gap and create the actual |
| Objectives include:o Gross margin improvemento | | | | contingency plan. This plan should list detailed |
| Increased market shareo Decreased overheado | | | | strategic initiatives, action plans, critical constraints, |
| Cost containment - Death by a Thousand Cutso | | | | milestones and key performance indicators to be |
| Stable customer serviceo Supply chain | | | | used in the accountability process. All numbers and |
| managemento Retrenchment - reduction in force | | | | spreadsheets showing data crunching must |
| if necessary | | | | back-up the contingency plan. The basic methods |
| SO WHERE DO WE START? | | | | used to "close the gap" are:o Reduction in forceo |
| Step #1 | | | | Cost containment (death by a 1000 cuts) |
| All budgets generally start with a sales forecast. | | | | Gross profit improvements may not be realistic |
| Go back to the Vice President of Sales and | | | | due to the market dynamics during economic |
| request a new, realistic forecast. By the way, | | | | turbulence. However, pricing and purchasing |
| sales management is intimately involved in this | | | | opportunities should be explored to determine if |
| process. Chances are the new realistic forecast | | | | changes in process, control or effectiveness can |
| received from the sales force is going to be highly | | | | contribute to an increase in profit margins. Many |
| optimistic. It is by nature difficult for any | | | | times closer management of the pricing system |
| salesperson to forecast anything other than solid | | | | alone can produce an increase in profit margins |
| growth regardless of conditions. This is especially | | | | without increasing prices. This could contribute to |
| true if their incentive is based on revenue growth. | | | | closing the GAP. Each budget should be |
| The Chief Financial Officer (CFO) takes that | | | | categorized to reflect how the "Gap" (deficit) is to |
| forecast and using historical percentages creates | | | | be closed. |
| a proforma (a projected Profit and Loss | | | | I. OPERATIONAL STRATEGY |
| statement based on the forecast). Unless your | | | | Red Light-Yellow Light-Green Light |
| sales force is unique and turned in a forecast | | | | Once the budgets are compete and the GAP |
| showing no growth or a revenue decline, this | | | | closures (cost reduction initiatives) are identified, |
| forecast and proforma becomes a basis for your | | | | you must determine the timeline for execution |
| "Optimistic Budget." | | | | and at what stage of economic crisis the |
| Step # 2 | | | | company is in. How do you know when to initiate |
| The next step is to take the current year's actual | | | | further cost reductions, when to relax and when |
| performance and extend it through year-end and | | | | to be on guard? In turbulent economic times, you |
| determine the profitability or the extent of loss | | | | must be able to act and react quickly. You will be |
| expected. Additionally, take the prior year's actual | | | | observing numerous indicators. Interpretation and |
| Profit and Loss statement and post it openly in | | | | understanding of these measurement tools is |
| the "War Room." I mention "War Room" because | | | | critical. These indicators may include among |
| you must have a convenient, confidential place for | | | | others: |
| your contingency planning team to meet regularly | | | | Internalo Cash to cash cycleo Operating profito |
| and develop your plan. It's called a "War Room" | | | | DSO-accounts receivableo Payables ageing-trend |
| because there can be a lot of blood shedding | | | | lineo Gross margin %o Gross margin $o Quote |
| involved in a situation when the company faces | | | | activityo Backlogo Book to ship ratioso Head |
| substantial economic crisis. | | | | counto Specific initiativeso Budget analysiso Book |
| Create a proforma for a realistic forecast and a | | | | to quote ratios |
| catastrophic forecast just as you did for the | | | | Externalo Interest rateso Manufacturing backlogo |
| optimistic forecast. These three proforma's | | | | Purchasing managers indexo Business publication |
| become the platforms to build your three new | | | | reportso Government statistical web siteso |
| budgets. If you are in the first half of the year, | | | | Association reports |
| you use last year's actual numbers as a basis for | | | | The red light, yellow light, green light scenario |
| determining your three new budgets. If you are in | | | | establishes what mode you should be operating in |
| the latter half of the current year and can | | | | based on the key indicators you have established. |
| accurately predict year end results without the | | | | Red Light - Catastrophic Plan |
| impact of any of the changes discussed in your | | | | Yellow Light - Realistic Plan |
| assessment process then use that annualized | | | | Green Light - Optimistic Plan |
| proforma as your basis point. | | | | In a contingency situation you automatically |
| The three budgets you need to prepare are called | | | | implement the realistic plan in a precautionary |
| "The Catastrophic Budget," "The Realistic Budget," | | | | status. You are in the yellow light mode. You |
| and "The Optimistic Budget." | | | | determine when and if you move to either the |
| THE OPTIMISTIC BUDGET CALCULATION | | | | red or green mode by tracking your indicators. |
| In calculating the necessary expense reduction | | | | Window of Opportunity |
| and margin improvement the optimistic budget | | | | The state of the economy is a fact. How you |
| takes your platform year proforma revenue as | | | | feel about that fact and what it means to you |
| the forecast. You could even adjust it by a small | | | | personally is a belief. Your beliefs have a major |
| percentage according to individual circumstance. | | | | impact on your employee's attitude. Beliefs that |
| The idea is to demonstrate credibility in recognition | | | | drive your sales behaviors are the keys to |
| of the possibility that conditions can become much | | | | becoming successful in a down economy. If you |
| better than anticipated. In that event, you are | | | | believe that this economic crisis can provide you |
| prepared to execute according to plan. Your | | | | with opportunities, then your attitude will drive the |
| budgeted revenue becomes a higher number | | | | behavior of your employees. |
| utilizing historical data and percentages; you | | | | This is Not the Time to Panic. Yes, there are |
| calculate your gross profit dollars. You then take | | | | economic problems, but there are also |
| your platform year's budgeted total expense | | | | opportunities! Leadership during these tough |
| (without any restructuring adjustment) and | | | | economic times is about not panicking, and that's |
| subtract that from the gross profit dollars. This | | | | exactly the message I want to get across... don't |
| shows your resulting pretax profit or loss. | | | | panic! Panic causes knee jerk reactions, and |
| THE REALISTIC BUDGET CALCULATION | | | | they're rarely correct. Deliberate leadership, clear |
| In calculating your necessary expense reduction | | | | thinking and solid contingency planning strategies |
| and margin improvement the realistic budget | | | | will lead to success and recovery. Panic leads to |
| takes your platform year proforma revenue and | | | | failure. As a leader you need to be deliberate, |
| decreases it 5 to 20%. This may vary according | | | | thoughtful, and take the actions necessary to |
| to individual circumstance. The idea is to | | | | stabilize the future of your individual business. |