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True story: planning vs. black swan disasters

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True story: planning vs. black swan disasters

By Tim Berry, Guest Blogger
Published: July 23, 2013

Imagine yourself in charge of a 40-person company, selling small business software, during the sudden crash of 2008. Your sales had been lagging a bit all year, but as the financial news blackened in late summer and early fall, your sales plummeted. September sales fell to 25% below the previous year, 30% below your planned level. October sales fell again. Within one short 10-week period, you found yourself falling from slightly profitable to below breaking even.

What do you do? Of course you cut expenses; that’s obvious. How to you decide what to cut?

And in this situation – The unexpected, unforeseen sudden plunge – how does a business plan help? Are you glad you have it – or is a plan, and planning, entirely wasted because it didn’t predict the disaster?

Back to the story. In this case (and I’m skipping names and details on purpose, because I don’t want it to be promotional), although the business plan was suddenly obsolete, it served as a key management tool for managing the crisis situation.

The plan in question had been developed almost a year earlier, for a company that had a fiscal year closing in September. However, it had been reviewed and revised monthly, so it was kept up to date.

That plan managed not just a strategy summary, but also dates and deadlines and responsibilities. And its projections included not just sales, but also cost of sales; and expenses including salaries, other fixed expenses such as rent, utilities and so forth.

Although the numbers in the plan became instantly obsolete when sales dropped, the relationships didn’t. The management team was able to use the plan vs. actual results to gauge the impact of falling sales, and then look ahead to the planned flow of expenses to decide what to cut.

One important insight that came from the plan was that many of the expenses fell automatically because they were variable expenses tied directly to sales or cost of sales. For example, some channel marketing expenses were contractually tied to channel sales, so some expense cutting was automatic.

Another important insight was that it would be possible to cut enough discretionary expenses to preserve financial health without cutting payroll. In this case, the company decided that losing people wasn’t a good idea. They liked the team in place and didn’t want to cut jobs that they’d have to recruit again and then train again a few months later, if the sales turned back up.

So the plan, with its up-to-date monthly revisions, operated like a dashboard. Turn one dial one way, another the other way.

Without a plan, it would have been a lot harder to look at connections and relationships between sales, expenses, marketing goals, discretionary and non-discretionary expenses, and adjusting for the sudden crisis. With a plan, the options were visible, and the decisions were easy to make.

About the Author:

Tim Berry

Guest Blogger

Founder and Chairman of Palo Alto Software and bplans.com, on twitter as Timberry, blogging at timberry.bplans.com. His collected posts are at blog.timberry.com. Stanford MBA. Married 44 years, father of 5. Author of business plan software Business Plan Pro and www.liveplan.com and books including The Plan As You Go Business Plan, published by Entrepreneur Press, 2008.

Comments:

Black Swans are very interesting phenomenon; however, there is absolutely no substitute for great planning. I will take a well planned business strategy over getting lucky due to a once-in-a-lifetime event any day.
Great article Tim. Black Swans are an interesting phenomenon. It is definitely something to consider when dealing in any business that requires risk and predictions. Best to always plan regardless of the likelihood of the scenario. Having a plan to fall back on is key.
Nice article! Business planning is so critical today more than ever because everything can change so quickly as your story introduces. As an additional perspective, when writing a plan or revising it because of change, think about where you want to be 3 years out given current conditions. From the 3 year perspective, consider backwards everything that must be put in place to get from here to there. This approach helps to define precisely what you need to do tomorrow and the next day to get there.

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