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Q. We are in our annual planning cycle and we are trying to do a decent job of dealing with the economic turmoil that surrounds us. The problem is that everywhere we turn we hear a different and often conflicting view of what is going on, what the causes are, and what the future holds. How can we prepare for the future when nobody seems to really have a handle on it?
A. Someone recently told us that the purpose of economists is to make weather forecasters look good. The reality is that all forecasts are subjective. We just don’t know by how much and in which direction they are "right" or "wrong." The current economic situation is entirely new territory, making it all the more difficult to predict what is next.
How can we deal with this uncertainty in practical ways? Here are some thoughts:
- When weather forecasters say it will rain, they are right; it will rain somewhere at some time. Similarly, every economic forecast is right, somewhere and at some time. The economic climate in which your business operates is unique. It is a microclimate of your company, your industry, your customers and your locale. Know it well. Learn all you can about how it is different from the larger economy. Explore trends in how your business has reacted to earlier economic conditions, and then try to develop your own forecast.
- State the assumptions you make when you translate this forecast into a business plan.
- Track your assumptions relentlessly. Watch to see how the future -- as in next week and next month, not next year -- develops compared to your assumptions. Alter your plans accordingly.
- When you develop your plans, do a sensitivity analysis: Ask yourself how wrong your assumptions can be and still be OK. Put another way: How wrong do you have to be to cause a disaster? If only the slightest error yields catastrophic results, re-work your plan.
- Build flexibility into your plan. Be nimble.
This is a tool not intended to create certainty from uncertainty, but, rather, to create more control during times that may only contain greater uncertainty.
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