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Planning for the upturn

Updated Friday, 6th March 2009

Janette Rutterford talks about the difficulties companies face in planning for the upturn

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One of the characteristics of a bull market is that forecasting comes into its own. In the dot com boom of the 1990s, astronomic valuations were placed on internet and telecoms companies because optimistic and growing revenues were extrapolated into infinity.

The present value of all these future cash flows tended to be a very big number. This attitude is exacerbated by the use of spreadsheets such as Excel. It is very easy to start with a number, then grow it by a constant percentage, say 2%, which looks conservative. It is far harder to produce a cash flow forecast which has negative as well as positive growth.

In a recession, the opposite approach takes hold. Horizons shrink, with companies reluctant to look beyond five years, or even less. Those with cash flow problems think more in terms of months or weeks than years.

The key questions: when will it start, and how fast will it be?

But planning for the upturn requires companies to think beyond the falls in sales and profits of now. The key questions now are when is the upturn going to start, and how fast will the rise in sales and profits be?

Factors influencing the timing of the upturn include government policy: the more ‘quantitative easing’ - otherwise called ‘printing of money’- the quicker the upturn is likely to come. Leverage is also a factor – just as lots of debt helped boost profits in the boom years, so the current deleveraging of business will slow the recovery down. And how much companies have cut operations to save costs now will influence how quickly they can take advantage of the upturn. That’s why firms are mothballing plants – and employees – as much as they can.

Even if one can forecast the timing of the upturn, forecasting by how much sales and profits will rise is almost impossible. I certainly wouldn’t like to be asked to produce sales and profits forecasts going out ten years – or even five - for say an estate agency or a car company now. A crystal ball might be a better option than a spreadsheet!

Find out more

Make your own preparations for the upturn - be ready with Open University Business School courses certificate in accounting and financial management.

Video: Evan Davis explores the risks of cutting costs in a recession





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