The best way to be able to move fast when disruption strikes is to build contingency into your business planning process from the outset, says Colin Barrow
You might believe that this may just not be the best time to put together a business plan to start or grow a business. Bad news has hogged the headlines for much of the recent past. It probably will still feature prominently for months, if not years, to come.
The Covid-19 pandemic is a seismic disruption that has swept tens of thousands of businesses away, including a host of well established companies with decades of experience behind them. Burtons, Debenhams, Dorothy Perkins, Jaeger, Le Pain Quotidien , Oddbins, Pizza Express and Victoria’s Secret to name but a few hit the buffers in the UK. Big name catastrophes in the US include Hertz, J.C. Penney, J.Crew and Brooks Brothers, the iconic clothing company, who still hopes for life in some form after filing for bankruptcy; Hertz, J.C. Penney and Brook Brothers each had been around for over a century.
On the contrary it is arguably the very best of times. Just because restaurant and clothing chains collapsed that hasn’t signalled a trend towards weight loss or nudity. Businesses invigorated by new ideas and unencumbered with past baggage will step into these vacated spots, aided by a great business plan. Plenty of great businesses wrote their first business plans when the going was tough. Microsoft started in 1975, when unemployment and inflation were heading up and the economy heading down. In 2000 as the Internet Bubble burst Justine Roberts set up Mumsnet, the impressively successful website and internet community that now has over 15 million monthly users.
In the same year Baroness Martha Lane Fox and Brent Hoberman CBE lunched Lastminute.com, also one of only a handful of survivors of the bubble. As the financial crisis of 2008-10 set in Holly Tucker and Sophie Cornish got serious funding for Not in The Highstreet and Alex Chesterman and Simon Kain launched Zoopla, the property search website.
The areas explored here are for the most part good business practice at any time. For those of you who are sailors you will know that stowing ropes neatly where they belong is good seamanship. In fact you don’t really need to have any sailing experience to see that makes good sense. Then when one of the innumerable emergencies that always seem to happen at sea occurs you know just where to lay your hands on a rope, to tie up to a jetty or heave to rescue someone who has slipped overboard.
You can consider the contingencies discussed here as subjects any prudent business planner should build into their strategy. It’s just that when an economic storm hits we are reminded forcefully of their relevance.
Crisis is the norm in business
First you can recognise that business life after the pandemic will, in one important respect, be very much as it was before. It will be very risky. You don’t have to wait for a pandemic to strike down a business. According to figures from the Office for National Statistics (ONS) the number of UK business deaths increased from 311,000 to 336,000 between 2018 and 2019, a death rate of 11.2% compared with 10.7% in 2018. Also whilst Covid-19 type events and their catastrophic effect on business life are extremely rare, violent economic events are not.
In the mid-1970’s the UK economy shrank for 5 quarters and inflation hit 16% caused in part by a Middle East war induced oil crisis. The early 1980s also saw 5 quarters of contraction, company profits slipped by 35% and unemployment rose to close on 11%. The 1990s saw a banking crisis, one of many in the not so distant past. Interest rates hit nearly 15% (yes, really), before subsiding to around 6%. The new millennium started out with the dot-com bubble bursting, taking the NASDAQ tech stocks index down by 80%. On September 15, 2008 Lehman Brothers, founded in 1847 and the fourth largest bank in the US filed for bankruptcy. The ensuing banking crisis caused the deepest UK recession since the Second World War, before that of the Covid-19 pandemic.
So the message here is expect disruption as the norm and build contingency strategies into your business plan. You are almost certain to need them.
Stress test key numbers
‘Prediction is very difficult, especially if it’s about the future!’ is a quote attributed to Niels Bohr, the Nobel laureate in Physics and father of the atomic model. Numbers being the most visible element of any business plan are the most likely to be found wanting. The sales forecast underpins just about everything in a business plan, so this is the area to make sure your plan accommodates the range of possible outcomes, rather than those that are simply desirable.
The good framework for stress testing your business plan is the cash-flow forecast checking the impact of your key business assumptions being disrupted. Start is by asking ‘What happens if our sales are reduced by 20, 30 or even 40%?’ Then quantify the financial effects of such outcomes in your business plan. By way of example, Next, a British multinational clothing, footwear and home products retailer, has been war gaming for years. Until March 2020, the retailer’s worst case scenario was a 25 per cent sales reduction. Since April 2020, they have drawn up a new set of stress tests in which the drop is as much as 40%.
As with sales revenue, costs can take an unexpected turn for the worse, for example if inflationary pressures push up wages and material costs. If you want to be a glutton for punishment try out the ‘test to destruction’ approach seeing at what point a missed sales target and a cost overrun will become a serious threat to survival.
Managing matters even more
Good management is often replaced by crisis management when the going gets tough. But good management isn’t some woolly, intangible feel good attribute that some people are lucky enough to have, or clever enough to simulate. It’s a solid quality that can be measured. Also, and more importantly, it is a factor that explains why some businesses are more productive and as a consequence more likely to survive than their less well managed peers.
Studies by The World Management Survey find a number of characteristic that explain much of the differences in performance between businesses. Consistently monitoring and improving processes, setting and revising targets, and incentivising and motivating employees through merit-based hiring, firing and promotion procedures feature high on the list of desirable management traits. You should detail and incorporate these elements into your business plan.
A business plan has to show how staff will be trained, developed, managed and motivated to achieve the plans key objectives. Start with a training needs analysis (TNA) to see what new or updated skills are required and follow through with recruitment and succession plans to plug the gaps that may show up.
Funds are fundamental
‘Definition of a banker: A man who loans you an umbrella when the sun is shining, asks for it back at the first sprinkle of rain, and doesn’t own the umbrella in the first place.’ This quotation appeared in a Salt Lake City newspaper journal in November 1949, which along with a pedigree for the same theme stretches back to Mark Twain a hundred years earlier, appears in Quote Investigator.
The easiest part of planning, even including the stress testing process mentioned above, is estimating how much money your plan calls for. Harder is laying in place strategies for getting financial reserves in place in case they are needed. Yet running out of money is unsurprising at the top of the reasons for most of these failures. The money in question is cash, rather than profit. It all comes down to timing. You need to cash to pay for materials and wages now and will have to wait anything up to three months more for the cash to come in. The deal may be profitable but without cash cushion to rely on over the intervening period a business will very soon see itself in trouble.
Banks are not always a reliable source of money when the going gets really tough. So a business plan has to include a review of other funding options, private equity, crowdfunding, factoring, government grants, venture capital, community development funds, business angels and perhaps even a potentially more sympathetic bank than the one you are with now. Banks like to win new business too, and often take more risk than they might otherwise do to get a new account.
Not having funds in place to deal with disruptions that disrupt your business plan is a risk you don’t have to take in the UK. The 2020 Best Countries rankings, formed in partnership with BAV Group, a unit of global marketing communications company VMLY&R, and the Wharton School of the University of Pennsylvania, lists the UK as the fourth best place for entrepreneurs, out of the 73 surveyed, siting easy access to capital as a major benefit.
‘No Plan Survives Contact with the Enemy’
This synthesises captures the essence of the thinking attributed to Helmuth von Moltke, a successful German WW1 Field Marshal. His experience taught him that chaos is the natural environment of warfare so he advocated developing a series of options for battle rather than a single plan. In a Harvard Business Review article, Adaptability: The New Competitive Advantage the authors found that the companies that had been able to ‘Increase the clock speed’ their term for being able to move fast when conditions change, were more likely to be on the winning side. The best way to be able to move fast when disruption strikes is to build contingency into your business planning process from the outset.
Colin Barrow is co-author of The Business Plan Workbook and has lectured in business schools in the UK, the US, Australia, the Far East and throughout Europe. Following a career in business where he held senior staff and line positions, including that of managing director of a substantial manufacturing enterprise with multi -plant and multi-country operations he was Head of the Enterprise Group at Cranfield School of Management, a leading European Business School, for ten years. For five years he was a non-executive director of a high tech venture capital fund, has sat on Government task forces and is now strategic advisor to a number of business owners.
