How to plan a business when you cannot forecast the year

The honest answer is that you stop trying to forecast the parts you cannot forecast, and you start paying for the ability to change your mind about them.

That sounds soft. It is the opposite. It costs real money, it shows up on your P&L, and you should be able to say to the dollar what you spent and what it bought you.

Here is why it matters right now.

What last week's inflation number actually said

The June quarter CPI came in at 4.1% for the year, up from 3.1%. It rose 1.5% in the quarter alone, and it came in above the Reserve Bank's own assumption two weeks after the Bank had moved the OCR to 2.50%.

Read one level down and the number tells a more useful story. Petrol is up 27.5% for the year and diesel is up 71%. Stats NZ put almost a quarter of the entire annual increase down to petrol alone. Strip fuel out and inflation is 2.9%. Rents are up 0.5%. Domestic price pressure is easing.

So the cost pressure landing on your business is arriving from outside New Zealand, off an oil price set by events that have not happened yet, at the same time as the domestic economy softens. Card spending was weak in June. House sales fell. Net migration turned negative in May.

Two halves of the picture pointing in opposite directions. That is not a forecasting problem you can solve with a better spreadsheet.

Risk and uncertainty are different problems

Risk has odds attached. You can put a probability on it, which means you can price it, insure it, provide for it or build it into a budget. A bad debt is a risk. A machine failure is a risk.

Uncertainty has no odds. Nobody knows where oil goes next, because it turns on events that have not occurred. You cannot insure a maybe, and no amount of scenario work turns it into something you can.

Most of what a New Zealand business is carrying into the second half of this year is the second kind. The next OCR decision is not until 2 September. That is six weeks with no new information, which a lot of businesses will spend re-forecasting anyway.

What it cost one exporter

I worked with an export business that had committed to supplying a market with long lead times and expensive shipping. It was a sensible decision on the day it was signed.

Then demand shifted. They were left holding stock in the wrong part of the world, with capacity stretched at exactly the wrong moment.

Nobody could have seen the shift coming, and I would not criticise anyone for missing it. What made it expensive was that by then, every option had already been spent. The contracts were signed, the stock was on the water, the capacity was committed. There was no lever left to pull.

Efficiency is a commitment

This is the part most people miss. When you cannot put odds on the future, efficiency stops being free.

Every efficiency is a commitment. To a volume, a price, a supplier, a headcount, a shape of business. Lock in three years of supply at the best available rate and you have taken a position on three years of demand. Run capacity at 95% and you have taken a position on the mix of work you will win.

Every one of those commitments is a bet that the world holds still. In a year you can forecast, they are good management. In this one they are a bet, and most businesses are making it by accident.

The alternative is buying the ability to change your mind. On the P&L that looks like waste, right up until the day it is the only reason you had a choice.

Four places to buy it, and what each costs

1. Contract length on the input that actually moves. Twelve months at 4% more beats thirty-six at the best rate when the input is the volatile one. That 4% buys the right to renegotiate in a year, by which point you will know a great deal more than you do today. Pay it on the volatile inputs only and take the long rate everywhere else.

2. Headroom arranged early. An unused overdraft costs a line fee, usually a fraction of a percent of the limit. Not having one when a large customer stretches you costs you the decision itself. Arrange it while the numbers still look good, which is the only time it is cheap.

3. Capacity you can turn off. The split between permanent and flexible cost sets how quickly you can respond. A business running flat out on fixed cost has one plan. A business at 80% with contractors in the mix has choices. Know where your break-even sits under both.

4. Decisions with a trigger instead of a date. Name the number that makes the call for you. Order intake down two months running. Debtor days past 55. Then stop relitigating the decision every Monday. This one costs nothing and almost nobody does it.

When getting lean genuinely is the right call

There is a version of this year where tightening up is exactly right.

If your constraint is cash rather than uncertainty, buy nothing. A business with three weeks of headroom cannot afford to pay 4% for flexibility, because the flexibility it needs is survival and every dollar belongs in the bank. Optionality is bought out of headroom, so get the headroom first.

The same applies where an input is not actually volatile. Paying up for a short contract on a stable price is just paying more.

The test that keeps it honest

Optionality is a purchase, so treat it like one. You should be able to say this out loud: we are paying roughly $40k a year in higher unit cost and idle capacity, and it buys us the ability to change our supply and our shape inside a quarter.

That is a decision. If you cannot put a number on it, it is indecision with better manners.

Certainty is not available this year, to you or to anyone advising you. What is available is knowing which decisions you want to still be able to make in October, and paying to keep them open.

If you are running a $2M to $30M business and you have never put a number on what your flexibility costs, that is worth an hour. Contact me and we will work it out together.