With the recent economic slowdown, what impact does it have on your business? How much profit or loss do you think your business will incur in such trying times? And will your existing cash flow be able to support your business?

A well-thought business plan will provide you with answers to these crucial questions. As we are operating in an increasingly difficult business environment, not only do we need to know our market environment¹, we also need to understand our company's strengths/weaknesses, and then transform this understanding into some business plans to help us allocate our scarce resource in a balanced manner, so as to achieve our business objectives.

Business Planning - Where do you begin?
We need to take stock of our resources - that is, our Money, Manpower, Machinery, Materials, Markets, Space, Systems, and Technology. These will collectively determine our optimum production capacity. A constraint in one or more of these resources will limit our production capacity. For example, if the current cash flow (assuming no additional cash flow can be obtained elsewhere) allows us to produce a maximum of $10 million worth of goods, our production capacity will be limited to $10 million, although the machinery is capable of producing more. Given this capacity, we should then decide how we can optimise the production capacity to yield us maximum profits.

A Marketing Plan will have to be drawn up to direct our marketing and sales efforts to "sell" this capacity to the best bidders in the present market.

We need to determine if the current production is able to meet the market demand. We may have to adjust both the marketing and production plans until we arrive at a good fit of the sales to the current production and resources. For example, with the current economic climate, "smaller-ticket" items will be in greater demand. We will need to decide if the current production capacity is able to produce sufficient goods (of say, items less than $50) to meet the sales volume, and at the same time, keep the cost of production low to result in a surplus.

We can then start planning for an overheads budget to support our sales and production functions. This will be the budgeted Profit & Loss, which can in turn be converted into a cash flow (taking into consideration the terms of payment and the operational trade cycle²).

The following diagram depicts what I have discussed earlier:

How to arrive at a realistic forecast for the company?
In view of the economic turmoil, it seems almost impossible to arrive at a fairly meaningful forecast for the company sales and financial projections. So how can we prepare a sound business plan?

We need to think through the various possible market scenarios, and prepare not just one, but several sets of financial projections to cater for the different economic scenarios. The first set will be prepared based on what is required to breakeven our cash position (and possibly the profit & loss position). In an uncertain economic environment, it is absolutely critical to be sure that we can at least breakeven in cash flow terms.

If the breakeven can be attained, we can then proceed to review the market conditions and determine ways to improve profitability without jeopardising our cash flow. This may require a few simulations until we arrive at the optimum level of business in terms of cash flow and profit and loss.

Maintaining a healthy cash flow is very important to any business survival. This is especially so in today's uncertain economic environment, where many companies are alredy suffering from severe credit squeeze and negative cash flows.

With a sound business operation and a healthy cash position, we can instil confidence in our bankers and stakeholders, and maintain strong financial backing for our businesses.

If we are certain of a level of business operation and a healthy cash position, we should take an opportunistic stance - that is, to be "liquid" enough to seize upon those market opportunities that will yield us maximum returns with minimal risks to be incurred. An example is the availability of a batch of lowly priced raw materials due for clearance by a supplier. Assuming that we can purchase these raw materials and put them into production and sales fast, we will be able to increase both the profit and cash flow for the company.

However, if we are trapped in an unhappy situation where a loss or cash deficit can be expected, we may still be able to seek additional equities from existing shareholders or external parties, including private financial institutions, venture capitalists and public companies. We may also seek assistance from our bankers to restructure our current facilities and to request for deferment in the repayment of the outstanding obligations.

As you can see, not all is lost in this gloomy time. Swift actions to trim costs and increase productivity will help to reduce the deficits. It may even result in a surplus!

If you are keen to find out how you can conduct effective business planning for your company, we will be pleased to discuss with you.

Year published : 1998