YOUR BUSINESS PLAN IN A RECESSION
If you own a small business, you know that business planning in an economic downturn is difficult, particularly if you need to get a bank loan. If you need financing during a recession, you have to present a realistic business plan to your financial institution. This means adjusting your business plan to reflect the current economic conditions and looking ahead to forecast future economic events. Your financial institution will be more likely to grant you the funds you need if you indicate your understanding of the economic environment.
SHORTEN YOUR PLANNING CYCLE AND CUT YOUR EXPENSES
When the economy is in a recession or if a recession seems likely, shorten your business planning cycle. You need to review your business plan frequently. If you are developing a plan to try to get a business loan, set up your plan to reflect shortened planning cycles. Plan monthly if necessary, if you can or at least plan quarterly.
In a shrinking economy, you will sell less. Customers will have less money to spend. Indicate that you understand these issues in the financial statements you present to the lending institution.
FORECAST YOUR REVENUE STREAM VERSUS YOUR EXPENSES
To qualify for a business loan in a slow economy, banks want realistic forecasted financial statements that don’t overstate revenue or understate expenses. Develop financial statements for five years ahead. Use information from top economic forecasters to justify increasing your revenue estimates.
Some businesses are more ‘recession-proof’ than others. If your business sells luxury items, for example, you may suffer during a recession. If you sell commodities or necessity items, then your revenue may actually increase during the recession. You have to look at your industry in order to make accurate forecasts for your business plan and present the plan based on your assumptions to your bank.
PRESENT STATEMENTS OF CASH FLOWS
As well as revenues and expenses, banks prefer that your business plan includes cash flow statements. Cash is the life blood of your business. You can make a profit and still not have enough cash to operate your business.
You need to focus on maximizing your operating cash flows, particularly during a recession. Convert your revenues to cash flows, develop your statements of cash flow for five years, and present these to your lending institution along with your income statements and balance sheets. Be conservative in your estimates.
COMPLETE A SCENARIO ANALYSIS
To help your case with a bank, illustrate that you are aware that a serious, unexpected event could occur in a recessionary economy. A good business plan during a recession will include one or more scenario analyses that demonstrate what your revenue, expenses and cash flows would be if an event such as deflation or extreme inflation should occur.
In the case of deflation, prices drop and your revenue stream and cash inflows would drop. So would your expenses. Income and wages of your customers also drip and their purchasing power would not be as great.
In extreme inflation, your customer’s purchasing power is eroded. Revenue and cash flows would suffer and your expenses would be high. Considering such events would impress your banker.
If you prepare a thoughtful, carefully considered business plan in a recessionary economy, or adjust the business plan you have, you will have a better chance of securing debt financing through your bank in troubled economic times.