Annual Plan Time.
Let’s Try Non-Fiction
Inflation, Debt and Oil Make 2010 an
Especially Slippery Task
By Bill Wade
Once again September sneaks up, and it's time to do ‘the plan’. Most everyone on a calendar accounting basis follows pretty much the same formula (at least historically):
9 months actual +3 months estimated = BASE YEAR + (inflation = price) + share growth + market expansion + mix upgrade = PLAN + 20% = BONUS BASE !
This doesn’t count the endless weekly updates to the five year plan (if you are in a big, multinational), or the daily update to the monthly estimate (if you’re a smaller family business).
Everyone with a dog in the fight pushes - Sales tries to lower expectations, management tries to expand them, operations is caught in the middle, while finance waits to bayonet the wounded.
Since so many different industries are represented in our readership, I will avoid any specific growth (or contraction) targets that might help justify your own best guess to your boss. I can offer a couple thoughts that may help to make this process less painful:
- The more precise the plan, the greater the certainty that it will be wrong. How much time is wasted pouring over plans (projected right down to dollars and cents), when we really can’t guess at a good number for the end of the month. Don’t worry at the margin...worry about the margin!
A good plan, violently executed today, is better than a perfect plan tomorrow. General Patton was a great leader, while being a sufficient planner. His message - It is all about the execution!
- You can’t swim against market currents for long. The most dangerous (and common) error made in the aftermarket is to mistake a fad for a trend or to think that somehow industry wide slowdowns don’t apply to you. Beating on nearly dead customers is rarely productive!
Oil Is Going to Be Our Challenge
No part of our economy can escape the gravitational pull of oil prices, and supply and demand are not the only forces to watch as oil prices once again become a real boat anchor to this attempt at recovery.
The weak dollar has taken a leading role in oil's ascent. The dollar has traditionally influenced the price of oil and other commodities, including gold, which are mostly priced in the currency and usually move to compensate for changes in the its value.
Let’s review today’s crude oil fundamentals:
Demand = weak.
Supply = solid.
Political Risk = nominal.
Alternatives = increasing.
However, analysts say that one aspect of the greenback’s longstanding relationship with oil is changing. In the past, dollars earned by oil producers flowed back into U.S. assets or investments. The Gulf countries are thought to hold around $3.5 trillion in total dollar reserves, according to recent Wall Street research.
But investors say the proceeds from the current oil boomlet (petrodollars which historically were invested back in the U.S. in dollar-denominated investments) now have more needs back home or wider options in emerging markets or in the euro.
The dollar index, a trade-able instrument which tracks dollar moves versus a basket of six currencies, has fallen nearly 16 percent from June. Oil has gone from $42 to $72 in roughly that same time period - neither demand nor supply driven.
While gold (a currency/speculative commodity) has broken the $1,000 barrier, industrial commodities (corn, beans, natural gas, non-precious metals) have remained fairly flat. Turbulence in equity and debt markets caused by banks drawing in their horns because of bad loans in the U.S. mortgage sector has also played a part in attracting money into oil.
Everyone has a plan, Until they get hit!
Regardless of stock market valuations, our basic economy is not out of the weeds yet. Some recent economic indicators are good, especially durable goods. Housing prices and demand are headed toward stability. Private equity funds have plenty to invest.
On the other hand, the consumer is frightened and heavily in debt. The market run-up may be near its peak and most employment gains are government sponsored.
So plan away. It really is a great time for self evaluation. Remember, do not get discouraged, the process is nearly always more valuable than the actual result.