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Is there a new "normal" that we need to consider when we make financial plans now?
This question is part of the Focus Finance Roundtable: Financial Planning for SMBs in 2011 on January 27th, 2011.
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4 Answers
The new normal to consider in planning is that we no longer can rely on highly-leveraged situations to create growth - whether we're discussing small businesses, corporations, individual finances or even at the government level. For several decades we experienced a feeling of well-being and inflated consumer spending as a result of excessive leverage in the real estate markets, loose lending practices in general and excessive use of consumer credit...while in reality there was virtually no new job creation. Expectations that we will go back to that scenario should be adjusted to reflect the new reality: That we are in a predominately 'cash-only' economy now. In making financial projections about the growth of a small business, apply the most conservative growth forecasts and choose wisely on expenditures. Any surprises will then be on the upside.
There are several norms that exist in addition to the other comments. First, one financial plan is no longer enough. Every business needs their most realistic financial plan, and then they need to create at least one best case and one worst case scenario.
Second, businesses need to proactively compare their actual performance to their plans each month. This is an enlightening process that can help the company make timely decisions and adjustments to their operations to create the most beneficial outcomes possible.
Third, with the comparison of actual performance to the plan each month, businesses need to re-visit the assumptions they made. They should change the assumptions to what is actually happen and leave the assumptions alone that have repeatedly been validated by their actual performance.
I would agree that there needs to be a focus on liquidity. Despite small returns available cash should be placed in money market, short term cds that are FDIC insured. Businesses should avoid lines of credit with high interest rates while pursuing lines of credit (if required) that can be backed by an asset (ie. AR)
Good comments, all. You can view and download my take on the "New Normal" here:
http://www.smartfinanceoptions.com/TheNewNormal.pdf
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