We all make the three- or five-year business plan showing our company’s growth when times are good. Rarely does a plan forecast a downturn where sales and profits will be dramatically reduced. Owners and stockholders don’t want that scenario from management. Once the recession has begun, however, management must make a new plan that anticipates the next two years with declining sales and profits.
The new plan identifies the new sales forecast. Typical recessions can result in a sales decline of 20-40% in capital spending for industries like those associated with industrial heat processing.
At the very least, the revised plan must show a break-even result during this period. Why two years? The typical U.S. recession lasts at least 18 months, so plan for the worst.
Identify the key product sales that the company can focus on during the downturn. Spare parts can be an important part of those sales. Spare-parts pricing should have margins at least two to three times that of the basic products. Customers will always need some parts to keep the older machinery operational during the downturn.
Include more emphasis on service contracts if your company has a service department. Again, your customers are also likely to be cutting back on their own maintenance departments with the idea of outsourcing this business. Make sure you communicate this service availability to those customers. Service pricing should be carefully calculated to cover all costs and show profits.
Obviously, the new plan cuts all discretionary costs proportional to the reduced sales forecast. Travel expenses are always a key target, but be sure to allow enough expense to provide contact with your key customers. Carefully review the staffing and what each overhead individual does. You will find redundancies if you haven’t reorganized in a while. This will provide keys to staff cuts.
R&D spending must be carefully reduced. The company needs to identify any key projects under development and pick the one or two that can be completed in time for the next recovery. Having a brand-new product available for the market when the economy recovers can be a very important step. Protect the spending on that product.