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Fortune Telling and Vision

Of Peaks and Valleys in the Economic Landscape

By Richard Weisgrau

Business people often employ vision by forecasting future scenarios for their businesses. It is similar to dreaming about a photo essay or illustration and executing it, or rejecting it after the exercise. Forecasting is like fortune telling. It is a best guess based upon vision. Vision and fortune telling are related. vision and fortune intrinsically entwined. Today, it is time for each of you to exercise some vision by forecasting future scenarios to improve your fortune. Some thoughts and direction on this theme follow.

Vision

Successful business people and good photographers have one thing in common - vision. For the photographer, vision consists in the ability to interpret a scene, seeing how it will look when it is reduced to a two dimensional photograph, and seeing how a concept will look when it is translated into a scene and then a two dimensional image. For the business person, vision consists in seeing how a business will operate, grow, and deal with advancing its own goals and success. All vision comes from the same innate creativity. It is simply expressed in different terms and ways. Vision can be cultivated and improved. One thing for sure is that you, the photographer, have the vision to be both photographer and business person. You have to exercise it, and that will improve it and your fortune.

Economy is a landscape

Here's a practical exercise for you. I am going to present you with a simple scenario, based upon a business reality. I'll give you some tips on how to work with the data as we go.

The governing premise is this. The economy is a cyclical landscape. It has peaks, valleys, and plateaus between the peaks and valleys. As you walk the landscape, you will travel up peaks, across plateaus, and down into valleys. The most dangerous spots are the peaks and the valleys. When you are on the peak you can fall, and when you enter the valley, you can go so deep that you can't get back out. In short, too much business can ruin you, and not enough business will ruin you. You need a topographical economic map to be safe, but nobody makes one. You have to envision the landscape and plan for how to deal with traversing the valleys and the peaks.

The peaks are simple to deal with by a simple rule. Never over extend your business. You can take on so much that you lose your quality of service, or creativity. That is a fall. The valleys are more complicated. How do you survive when you are in too deep and don't have a way to get through the valley? That's the exercise we will address.

In 1992 and 1993 the country experienced a recessive economy. That is a valley. In 1994 the path led out of the valley, and back up to a plateau. That is a leveling out to a middle ground. Today, the economy is still growing. Growing is another term for reaching a peak. After any economy reaches a peak, it will turn down, and eventually reach the plateau again. The danger lies in the fact that the valley comes after the plateau. You have to get ready to deal with the valley while you are on the peak and plateau. You do that by establishing what I call recession insurance. No you can't buy it; it is self insurance.

When will the next recession come? Well, if anyone knew exactly when that would be they wouldn't need to think about the problem. They would have the information needed to make them a billionaire overnight. But, we mere mortals have to do some fortune telling, or perhaps the better word is fortune guessing. Historically, in the time I have been in the business (since 1963) we see severe recessions happening in the first years of each decade. Often there are minor recessions in between, but the ones which are more likely to be fatal have been within the first five years of a decade. Guess what? The years 2000 to 2005 are approaching. If we are peaking now, the plateau could be two or three years, with the downturn in 1999 or 2000 and the valley of recession to follow shortly thereafter. Of course, no one can accurately predict the timing, but history is a good guide when vision is blurred.

Business and recession

Now for the exercise. Let's assume that you will be faced with a 12 month recessionary phase in the period from mid-2000 to mid-2001, and that you therefore have 36 months from July of 1997 to June of 2000 to prepare for it. How should you proceed?

First, make an assumption, based on a worst case scenario. Let's assume that your business will drop by 50 percent during the recession. Then let's assume that you will not be able to cut expenses at all during the recession. While you might be tempted to do this, it often requires spending more money than warranted on promotion and sales to keep the reduced volume of business flowing during a recession. OK, the problem can be stated simply: if you need X dollars to run to run your business in the 36 months before the recession, and you won't be able to cut back during the recession, then you will need Y dollars to supplement your business during the 12 recessionary months. Now if my college algebra course (in which I earned a D) taught me anything, it was that we can make an equation out of this information. Now remember, Y$ is 50 percent of the annual amount needed to weather the 12 month recession. The formula is Y = X / 3 x .5, which reflects that the needed supplement is equal to 50 percent of one year's dollar need in each of the preceding three years.

So, applying that formula to a business which is projected to gross $85,000 and $75,000, and $65,000 in each of three consecutive years, we see that X = $225,000. That means that the supplement needed for the recession will be Y = $225,000 / 3 x.5, which inturn reduces to $75,000 x .5, which equals $37,000. You have 36 months to create a liquid reserve with a minimum of $35,000. If you have a normal reserve of $10,000 , you will need to raise, save, or borrow $25,000 more to make it through the recession in good business health. That in turn is 11.1 percent of the $225,000 three year total. This means making plans to take 11.1 percent of all revenues for increasing reserves, or building your borrowing power to 11.1 percent of revenues, or cutting back 11.1 percent, or a combination of any or all of these elements.

Now for those of us who hate complex math, here's a simpler approach. Take the average of three years revenue and divide it in half. That is how much you would need in reserves in the above scenario. You can save it, borrow it, or cut it from expenses, or combine these means. Whichever way you chose to do it, it is planning for the eventual recession that will help to assure that you will be in business when the recession is over.

© Richard Weisgrau/ASMP

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