Category: Blog

Economic and weather conditions immediately come to mind when you think of factors outside your control. If a particular geographic area experiences an economic decline, there isn’t much you can do about it. If your business is dependent on fair weather, and unusual conditions prevent you from working, even short-term business plans will quickly go out the window. A house painter faced with nearly constant rain just won’t be able to do the planned work. If the profitability of a business that relies heavily on borrowed funds is affected by interest rates, changes in lending rates can be a huge factor.

In short, every business must deal with an environment in which key assumptions can change without much warning. A plan based on those assumptions is at risk. A good business plan can include contingency plans that help you establish how to react when the real world doesn’t conform to your plan. One way to do this is to look at how a change in one or more variables might affect your plan. Here’s how you might want to do that.

First, identify “environmental” conditions that would have the most direct impact on your business. There may be several. Make an effort to examine each of the environmental factors in turn so that you can develop a range of planning scenarios. Try to realistically estimate the number of days you won’t be able to work. Recent weather notwithstanding, it isn’t likely that it will never rain on days you would otherwise work, nor is it likely that it will always rain.

Second, try to quantify how changing conditions would impact your business and what the likelihood is that those changes will occur. Quantifying the result of a change in conditions is the easier of the two.

For example, if your business is heavily reliant on utilizing a line of credit to finance operations, a change in interest rate would directly affect the profitability of your business. If you assumed that you were going to pay $10,000 a year in interest, and an increasing interest rate pushes that to $15,000, your profit potential just went down by $5,000. If nothing else but the interest rate changes, at what level will you start losing money? In contrast, fluctuating interest rates wouldn’t present the same challenge to a business that rarely used its line of credit.

A little more difficult is the question of how likely is it that conditions will change? By definition, the factors are outside your control, but you can look at historical trends (e.g., the interest rate over the last two years) for some indication of the likelihood of changing conditions. If interest rates are a factor, consider a broad range of rates to determine what is the highest rate your business could tolerate.

A third step completes the analysis. First, you identified environmental factors that could impact your plan. Second, you assessed the likelihood that conditions would change, and you quantified the effect that each of these changes would have on your plan. Now, consider what would happen if, for example, interest rates go up and mid-way through your season, it’s already rained 11 days. Will you be able to meet your net income targets under these new conditions? Look at the factors with the potential for substantial impact on your plan and combine them in various ways.

Try to build reasonable “what if” scenarios that reflect your best estimates of what could happen. For example, if a salesman quits, you lose the ability to reach part of your customer base. But if the loss of the salesman results in reduced sales, and production and wage costs also go down, the temporary loss of a salesman might hurt growth potential more than current net income. Knowing that you can survive for awhile without him gives you a better chance to hire a high-quality replacement. Try to limit your modeling to situations that might realistically occur. Remember that some potential factors are just too remote to concern you.