With the rising risk of recession, many companies are thinking about recession contingency plans. Every good plan has goals, but they are often overlooked in recession plans. The best performing businesses, however, think through their goals at the beginning of the planning process, then circle back to the goals to ensure they are met when the planning is done.

Some goals will relate to capabilities to be maintained, so the company can continue in a particular line of business. Other goals may relate to locations that should be maintained. I addressed non-financial recession goals in an earlier article.

Different companies will have different financial situations, but common goals include paying dividends, meeting loan covenants, and, of course, survival. Family-owned businesses often commit to paying dividends to the shareholders not working in the company. If maintaining those dividends will be difficult, an early conversation with the owners is better than a bad surprise. Publicly trade corporations should consider how important the dividend is to shareholders. Good investor relations professionals can advise on the issue. Sometimes investors understand that this is happening because of a recession, but in other circumstances shares were purchased because the dividend was considered secure. In that case, a major selloff could occur from a dividend cut.

Other financial goals include meeting bond or loan covenants. These are not always top-of-mind to the executive team, so covenants should be reviewed early in the recession contingency planning process. Similarly, key suppliers may be extending trade credit. Knowing what would trigger a vendor cutting off the line of credit is important early in the planning process.

Finally, maintaining enough cushion on the balance sheet that the leaders and owners sleep well at night is a valid concern. Translating vague notions, such as “enough cushion,” into quantitative goals helps the plan achieve the desired end.

Dr. Bill Conerly Based on data from US Department of Commerce and dates from National Bureau of Economic Research

Companies usually begin with a recession scenario, some vision of how bad a downturn they want to plan for. The assumption I suggest to my clients these days is a recession half as bad as the 2008-09 slump. Half as bad as the last recession is, in fact, the average of all post-war recessions. So a business calculates its percentage decline in sales in the last recession, cuts those percentages in half, and then applies that to their current financial condition. It’s not a perfect approach, as a milder recession may also be shorter, but it’s a good ballpark approach, and much easier than getting a customized macroeconomic scenario.

Some costs decline automatically with less production, such as raw materials. Other expenditure spending changes must be assumed, such as staff reductions within non-production departments, deferring planned capital expenditures, and so forth. Managers can roll through some likely changes in the business and see if the financial results achieve the goals. Most often multiple iterations are needed to hit the target, or a goal-seeking software can be used.

Before accepting the results from this exercise, the planning team should give the action steps a feasibility test. If X people need to be laid off, think through which departments will lose staff. The cuts should be reviewed by managers at the planning stage. The managers will probably say that the cuts are too severe, but they may provide insights into cases where critical capabilities will be lost by certain reductions.

The next recession may not be average, so companies can create alternative scenarios, such as mild, moderate and severe recessions. This process will help determine which goals are achievable across all scenarios, and which goals may have to be abandoned when survival is doubtful. The result will be goals that are tiered.

Multiple recession scenarios are not hard once the basic framework is set up. The work is in the structure of the planning system. With that structure in place, the base case forecast than be cloned, then the sales change assumptions adjusted to a different severity of recession.

Like all goals, the declaration of the goal has little value, but figuring out how to achieve the goal is precious.