Planning: Fool’s Errand or Lifesaver

Planning, forecasting, modeling.  There are terms of art at best.  At worst they smack of naivety, the blindness of disaffected experts, the interference of bureaucrats.  And yet, the “fail to plan, plan to fail” trope didn’t arise for nothing.   

For some brevity, let’s take it as read that by planning (and all related concepts) I mean a process that is the servant of the owner/leader/entrepreneur and not a passive-aggressive hostile takeover by CPAs and spreadsheet wonks.  A servant doesn’t chart the course (“numbers driven”?), it memorializes leadership’s thinking and actions intended toward the goa—and provides means of on-the-fly adjustments as external circumstances evolve. 

“All models are wrong, but some are useful.” – George E.P. Box 

Modeling is an iterative process of continuous feedback and development and done rightly connects the entrepreneur to expected financial outcomes without turning them into a finance wonk.  A forecast, and plan, starts best with actions, inputs, outputs, and unit prices, and relates these to all the important measures that econ wonks love best.   

We keep our measures few and simple: liquidity, profitability, and growth. 

I suppose the next objection is that such a thing can’t be done in so many cases.  The businesses are too complicated, the future is entirely unknown (when is it not?), the history is too short, etc.  I can only offer that we’ve been doing this in agriculture for decades—weather, global markets, local competition, logistics, and such must place ag second only to energy for volatility and unpredictability.  Our clients, with some practice, set and execute plans like clockwork, despite all the above. 

So yes, it can be done.  Having provisionally established that, we can move on to a specific case as to what planning *does*.  Contra the catch-22, 1) our industry doesn’t change much so we don’t need to plan, and/or, 2) our industry is too volatile to plan, it *is* practical not theoretical. 

Sometimes volatility has an entirely human dimension—the least predictable of all. 

A Crisis Averted 

A few years past startup, a capital-intensive firm embarked on major capital investment for the usual reasons—the chance to grow, to sustain and even enhance the quality of their product, and also, to reduce risk.   

How does moving from what is (relatively) known to what is unknown reduce risk?  Planning.  We’d built the models to tie production to prices to finance.  The accuracy and predictive capacity of these models had been tested and refined for many years. The owners had a long track record of equaling or besting a plan that had been first tested then set using those models. 

We assisted the owner in generating various scenarios testing for variables beyond their control.  They showed that return on assets was higher with the expansion than without, that the firm’s resilience to shocks was greater post-expansion than pre-, and that liquidity (call it margin for error) was more generous.   

The bank agreed and backed the project, and a temporary construction loan was put in place to be termed out when construction was complete.  

And then the human variable, the ultimate Black Swan, made everything interesting.   

An inexperienced appraiser failed to understand the business and returned a valuation that very nearly set the value at scrap.  Bank internal controls forbid shopping for a better number.  That is understandable, but it’s also true that rules and regs have a tendency to enforce mistakes as often as prevent them.  The bank pulled the term financing, which threatened to land the whole project on the our client’s operating loan.   

The owner saw the business about to evaporate in a bureaucratic snafu, destroying so much accumulated capital, setting to nothing a decade of hard work, and ending any hopes of a legacy for the next generation (already active in the business).  Setting the appraisal at scrap value was about to become self-fulfilling prophecy. 

Shaking off the shock myself (I have to admit in all the stress-testing scenarios I’d run, this one didn’t turn up), and knowing my client had a detailed plan in operation, I opened the models, set term financing on the project to zero and looked to answer the question:  how much time do we have? 

Turned out we had 90 days before the potential stress on the operating line would’ve forced some dramatic and not at all profitable remedies.   

But I knew my clients built negative expectations into the plan when dealing with factors beyond their control.   I also knew that for several years running, these negative expectations hadn’t materialized, and early signs were that they wouldn’t in the current operational cycle either.  So, add tthat second modification to the model’s variables vs. the stress-tested plan.

 Lo and behold, the operating line was much smaller than the max allowable under all bank covenants even having to carry the capex and added volume from the expansion.  

What to do?  We held the lenders accountable, at least ethically, for the snafu, sent them scurrying to find alternate means of putting term loans under capex.  To be fair, they understood fully the severity of their mistake and were already scrambling to find an alternative.  Most importantly, my clients were freed to stick to the plan & execute.  A good plan is wonderfully clarifying and both an inoculation and antidote against panic.  With the matter settled my clients could focus on execution, which they did, and sailed through that operating cycle with more than enough headroom in their credit line. 

And yes, the bank eventually made good and found alternate means of term financing.  Just because you *could* proceed without terming your capex doesn’t mean you *should*.   

Without a plan what would have happened?  It’s impossible to know with certainty, but we do know what it looked like and what the ownership was thinking based on their plan:  without the term loans in place they would run short of cash.  They would need to change the terms with their suppliers, or reduce their capacity, or try to cut costs.  All can work, briefly, but the damage to their reputation, the loss of future revenues due to reduced capacity, and the damage to quality due to forced cost cuts are often permanent. 

Is this a de fact endorsement of ignoring problems and hoping they’ll go away?  There is a place for this approach, but that is best enacted when you can, via planning, work out which problems you can safely ignore and wait for them to resolve on their own.  In our case, while it was typical that the loss (temporary) of term financing was a non-issue, it was at least possible and with historical precedent that it would run them out of funds in 90 days.  The planning process enabled them to size up the threat, know the minimum amount of time to fix it, and know the conditions, week-by-week and well in advance, under which ordinary business would mitigate the problem. 

Knowing that, they did what owners, leaders, and managers are supposed to do: create an island of stability for their employees, supplies, and customers in a very volatile and shifting environment.