Planning Economics for 2009

October 20, 2008
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Michael Marks, co-founder of Indian River Consulting Group, encouraged distributors to plan their profit first when considering their 2009 business plans.

With all the talk of bailout plans and stock market fluctuations, no one is questioning that business practices must shift in order to successfully confront the new tests the economy is administering. Distributors across the nation, including HVAC distributors, are not immune to these required business practice changes. Where the shifts will occur and what exactly they mean to each industry, however, is still up for discussion. In the midst of this changing atmosphere, Michael Marks, co-founder of Indian River Consulting Group, Melbourne, Fla., offered some different suggestions for distributors to consider during the Risk and Opportunity in 2009: A Conversation With Mike Marks Webinar presented by Modern Distribution Management (MDM).

According to an online survey conducted by MDM and released in September 2008, of 234 respondents - approximately 61.5 percent distributors and 29.6 percent manufacturers - less than 1 percent are not concerned at all about the economy. Fifty-six percent were concerned about the economy and 25.4 percent were very concerned.

The survey results also exposed key elements in determining the approach many distributors intend to take in 2009 - “We’re staying, we’re hunkering down, and we’ll make it through.” Approximately 90 percent of respondents didn’t have plans to sell their business or change ownership in the next six months. Sixty-seven percent had no intention of making any acquisitions in the next six months either. And almost 70 percent don’t expect the size of their workforce to change over the next six months, even though approximately 25 percent of that number are considering layoffs as a cost-reduction strategy, but there are no plans for significant cuts as of yet.

INTERNAL EXAMINATIONS

Understanding that distributors have many decisions to make for the coming year, Marks suggested that when preparing a business plan for 2009, distributors should take a hard look at their business practices from two perspectives - internal and external. He began his Webinar discussion by addressing the internal factors with an interesting question, “How much money can your business make if you stop trying to grow it?” Growing a business takes capital, which eats at the profit margins. To combat this, Marks suggested setting aside all of the incremental planning for 2009. He also considered it essential for distributors to change their ways of thinking about profit.

“I think for your 2009 planning cycle, probably the single most important thing that you can do is - aside from stripping out all this incremental growth stuff - to plan your profit first,” he explained. “It doesn’t matter what percentage number you choose, the key concept is the sequence of thought.”

Traditional plans examine revenue, the cost of goods sold, and expenses, finally determining how much profit was yielded from what was left over. When planning profit first, Marks instructed distributors to first decide how much profit is desired, determine the yearly margin, subtract the margin from determined net profit, and then determine what is left to spend on expenses.

“We may end up like a bunch of vultures on the side of a highway fighting over the dead carcass, but fundamentally the business process and the planning discipline is all your various functional heads sitting around fighting over that expense number and saying ‘where do we actually put this thing where its actually going to do us the most good and get the most leverage out of the entire thing?’ ”

His third internal suggestion was to “suck less.”

“Let’s take the thing that we’re worst at in the world and let’s not be as bad next year as we were this year,” instructed Marks. He encouraged distributors to closely examine the worst of four specific areas - trading partner relationships, products at end of life, staffing, and process-critical constraint.

“Look at staffing decisions that have been made since 2002. Have all of them been right? Are there trading partners that you are hanging onto that you shouldn’t? Is there a change that needs to be made?” he said. “You should always carry your wounded, but you should not be carrying your dead.”

EXTERNAL WARNINGS

External factors also weigh heavily on the success of planning for 2009. According to Marks, the economy is reaching the end of an expansion cycle and there is a lot of uncertainty ahead.

“It is time for people to start preparing themselves, getting their businesses under control so that they are really positioned for when this thing comes back out of it,” he explained. “The key thing is not necessarily revenue growth. What you want, what matters, is how you are going to set up and what do you need to maintain your position.”

In Marks’ opinion, it is going to take a long time for the residential housing, subprime, and lending issues to sort themselves out.

“In the meantime, distributors are most likely going to face a two-tier economy - either their suppliers will be out of capacity or they will be cutting production.”

Another external factor for distributors to face is the customer.

“Before you do your 2009 plan, I would strongly recommend, and this is at the sharp end of the stick, go deal with the guilt that every one of us feels about customer input,” instructed Marks. He then proceeded to make a “homework list” of tasks for distributors to use in evaluating customer input and opinions.

• Go talk to 20 customers, by phone, by visit, or in groups - just talk.

• Dive into what your customers do online and see if your business offers those same things.

• Find out what wakes customers up at night.

• Figure out what you can do about that.

After considering market position and obtaining customer input, distributors might be wise to examine how to manage their business risk.

“Build a scenario for losing one of your largest suppliers or customers. Build a scenario for a rapid decline in revenue of 20 percent,” said Marks. “It is also time to revisit your company’s debt structure and asset levels, and build or update the ownership succession or exit plans.”

His No. 1 warning was, “Don’t run out of cash in 2009.” Maintaining liquidity, according to Marks, is key in any economic structure.

“Hope is not a strategy. And believing that you can sell your way out of this and sell your way into profitability is a drug-induced fantasy when you are on the shoulders of an economic cycle,” cautioned Marks. “You’re going to do a whole lot better to recognize the economy for what it is, scale back, fix the things you’re weak in, and then go back on the offensive as a smaller, leaner business.”

Marks encouraged distributors that knowing their business, measuring what is happening on a consistent basis, and keeping an eye on customers will be key in maintaining any 2009 plans.

“If you have a good balance sheet right now, you are going to be able to be the guy who brings an assault rifle to the knife fight, and it is going to be really, really important as we go forward in 2009.”

Publication date: 10/20/2008

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