all types of enterprises experience them. Furthermore ... firms. The sophistication in forecasting of the small entity is usually considerably less and therefore the .... But, like all capital investment decisions ... future intentions as well as the current events of its ..... Frazee, Valarie, "Insourcing Saves Jobs at Harmon", Workforce,.
THE COMMON CRISIS OF ENTREPRENEURIAL ENTERPRISES – REVENUE FLUCTUATIONS David M. Ambrose and John R. Anstey University of Nebraska at Omaha ABSTRACT In examining the variety of challenges and issues confronting business organizations from various industries and various sizes, a common feature is revenue fluctuations. These changes can be seasonal, episodic, shifting of trends, or sporadic, but all types of enterprises experience them. Furthermore, these changes are difficult to manage and yet are largely considered as damaging and their impact as negative. The more definitive character of these revenue changes include clients who shift their allegiances and buying to other sources or accounts that change their mix of demands from higher to lower priced inventories. Likewise, customers may delay their purchases while reducing their inventories rather than maintaining the prior inventory levels. Of a less defined change can be a general reduction of the quantities required by customers or a dramatic but unexplainable short-term increase in sales revenues. The underlying causes originate in general from two sources: factors that the business institutes, such as reduction of accompanying services, additional interest on account balances, or even the elimination of products from the available inventories. The other general cause of these revenue fluctuations is external to the business and for the most part not controllable. Such factors might include changes in the cost of retail gasoline thereby reducing the number of visitors at a resort, bad weather conditions that affect the incomes of the agricultural producer, a competitor instituting aggressive measures, and a greater number of school
children than anticipated increasing the requirement for textbooks. While instructions to entrepreneurs include the importance of forecasting, we have not included an orientation to the reality about the inevitability of the unknown and unpredicted fluctuations of those forecasts. The troubling point of these revenue fluctuations is the inability of the entrepreneur to predetermine their occurrence, their intensity, or their duration. Most estimates include operating according to different growth scenarios but do not assess the impact of the unforeseen variations of the gyrations of revenues over those growth ranges. The task of the entrepreneur is multiple. First, forecasting must become more sensitive and predictive. In addition, scenario structures must be reflective not just of long-term growth patterns but of the effects of various possible changes of revenues, especially those that have been diminished. Finally, entrepreneurs must manage their businesses to alleviate the impact of revenue deviations from the moment they become evident, and to institute measures that have a contrary effect on fluctuations especially in those instances where they are more predictive. The desired condition is known long-term steady and unwavering growth patterns replacing wild variances that test the seamanship of the entrepreneur. STATEMENT OF THE COMMON CRISIS A consultant to a Fortune 200 corporation was asked: "You have experience with a wide variety of industries
and also a wide range of businesses, what are those features that you find that are common and shared by all of these entities?" The consultant pondered the question and replied - "They all suffer the consequences of irregular sales and revenue fluctuations and the majority of these changes are either not predictable or their intensity is unknown in advance or both". All businesses could radically improve their operations if they could rid themselves of these fluctuations and be permitted to follow a smooth and predetermined trend into the future. This paper was derived from this insight and its content addresses this crisis that is common to all enterprises including the small and entrepreneurial one. In fact, the researchers argue sales and revenue fluctuations impact the small and entrepreneurial firms more seriously than they do the larger and more dominant firms. The sophistication in forecasting of the small entity is usually considerably less and therefore the future less well delineated for the small firm. It would be unusual to have an employee in a small business whose sole responsibility would be forecasting and planning. "Small businesses have very lean staff and the owner plays multiple roles such as CEO, CFO, strategic planner and general sales manager". (Singhvi, 2000). Given that, the smaller firm is less prepared and more surprised by the events of future fluctuations. Also, the resource depth of the small firm is considerably less than that of the major businesses. Confronted by sales and revenue surprises, both positive and negative, the small business has less ability and less resilience in its attempt to respond to the altered conditions. Therefore, within this paper, where there are examples and references to the impositions of fluctuations on large business, it must be remembered those impositions are increased and magnified in the operating arena of the small and entrepreneurial business.
The writers agree and accept the fact the small business cannot escape the inevitability of sales and revenue fluctuations. This condition is granted. The challenge therein becomes one of being able to predict their occurrence and magnitude. While this does not eliminate the necessity of responding to these fluctuations, it does alleviate the surprise element of the impact. CORPORATE LAYOFFS: REFLECTIONS OF GYRATIONS While businesses do adjust to the unanticipated deviations from trend growth with changes, many of which are never apparent to those external to the firms, major reductions of the workforce are obvious results of radical revenue impacts. When the firm is publicly traded or of a size that is newsworthy, the downsizing is a reportable incident attracting considerable attention. As noted in recent reports, for example, these layoffs occur in a vast array of businesses and industries: "Olympic Steel Inc., Cleveland, cut its workforce by 80 employees in June to reduce costs in a difficult steel market". (Metal Center News, 2001) "Major companies that just last year were scrambling for scarce talent - giants like Cisco, JDS Uniphase, Lucent, Motorola, and Nortel - have engaged in round after round of painful layoffs since the beginning of the year." (Chin, 200 1) "Midway Airlines, a niche operator that expanded rapidly as the economy slowed, is halving its workforce..." (Ott, 2001) "Clariant will cut 1,000 jobs .... Clariant is the latest in a string of European chemical companies to announce heavy job cuts..." (Young, 2001) "Only weeks after announcing that 3,000 jobs would be eliminated from its domestic work force, International Paper
reported that it would be letting another 655 employees go..." (Printing Impressions, 2001) "After saying it would slash 1,200 jobs to cut expenses, 3Com Corp. dropped the other shoe last week" (Rendleman, 2001) Employment reductions are extreme measures to bring the businesses into line with reality after following severely flawed forecasts. If there had been a steady revenue flow, most if not all of these reductions would have been unnecessary. It must be noted that not all corporations pursue employee reductions as their solutions. Reflexite states that only if there is a loss for a period of two quarters or more, a "stage four decline", will there be the possibility of job losses. It will have exhausted all other remedies possible before eliminating jobs. (Workforce, 2001) These examples drawn from the public press are incidents in large corporations. However, the smaller enterprises, if facts were known, experience nearly identical changes in employees when there are significant reductions in revenues. In fact, in the smaller business the corrections made through reduced employee size may be more damaging. One employee in a firm of 10 people constitutes a 10 percent reduction. It is impossible in the small firm to make more precise adjustments, say 3 percent or 7 percent, because of the small employee base. A reduction of 655 employees at International Paper is a rather precise and well-defined reduction. In the small business, however, the 10 percent reduction may be too much or not enough, but usually not exactly the adjustment needed or desired. KNOWN BUT UNCONTROLLED GYRATIONS Significant gyrations in sales and net revenue even if they can be predicted with
preciseness still have a wrenching result in a business. Consider the adjustments that are required in retailing for the end of the year holiday season, namely November and December, when sales are known to greatly exceed the average of the other months. The task of employing and training, or at least orienting, a dramatic increase in employees is a daunting challenge. And, then managing the fixed assets of the store during the other ten months when reduced sales are normal is the reverse of the cycle. The historical and unchanging seasonal sales patterns of retailing even when known impact heavily on the management of the business. A case example is the telemarketing/mail-order fulfillment firm that each year must increase its workforce by 1400 employees, or more than 40 percent, to accommodate the holiday demands. Not only is attracting 1,400 people a challenge, the process of managing the attrition on the downside is nearly as difficult. Obviously, these difficulties are a product of irregular revenues and sales and would not be present if the workflow was an even and steady trend. Responding to opportunities for the small enterprises are challenges that are not challenges for larger businesses. To illustrate this condition, consider the small airfreight forwarding company with two employees. In its third month of operation, it received a quantity of freight that required leasing an entire aircraft and pilot to move the volume. No air carrier would respond until they were paid $2 1,000 in a cash advance. Fortunately, the airfreight forwarding company was able to arrange a short term, 30-day loan; to cover the costs otherwise the opportunity (and probably the account) would have gone to a competitor.
STANDARD RESPONSES AND REMEDIES TO GYRATING SALES AND REVENUES We have illustrated the dire circumstances of changed conditions that established the platform requiring significant downsizing in several major corporations. Again, these events are not unique to the corporate enterprise but are more obvious due to the size of their reductions and the public nature of their ownership. Small businesses are not immune from the same if not more severe adjustments in employment. Beyond the necessity of adjusting the number of employees, the experiences of fluctuations also result in adjustments and realignments in other segments of a business. One of the first points of change is in inventories. When sales turn south, businesses look to reduce their inventories and thereby radically slow their purchases. In fact, inventory levels is one of the indicators of the general business cycle of the economy reflecting the vitality and robustness of sales and the optimism of the future. The attractiveness of invading inventories to address reduced sales and revenue is the ability of the business to control the adjustment and the reduction of demands on revenues for replacement of inventory levels. Within the employee arena, increases in sales and revenue result in increases in overtime hours worked. Increasing the average overtime hours of a plant is very attractive to the business as it can be accomplished within the existing labor pool and eliminate the search for additional employees from an external labor pool. The converse, in a weakening sales and revenue condition, a reduction of overtime hours is the first course of resolution before reduction in the actual number of employees. Overtime hours, in fact, are so sensitive to demand fluctuations, changes
that reflect the market strength of the business, that the traded stock prices of a firm will follow by several months the changes in overtime hours. Cash management is entirely premised upon reduction of debt when revenues are strong and sometimes actually increasing debt when revenue is weak. Short-term debt is largely structured around the changing demand levels for products and sales. Manufacturers that have seasonal demand changes increase their debt during low periods to build finished inventories for the seasonally strong demand periods during which revenues are strong and debt is repaid. While this appears rather simplistic, the exercise becomes very tangled and dangerous when there are other changes in demand in addition to the seasonal fluctuations. In those instances, the business can find itself with excess, and sometimes dead, inventories or in a shortage of inventory when demand is strong and thus, unable to fully address the opportunities of strong demand, Consider also the conflicts within the decisions relating to plant expansions. The primary drive behind expanding production is the appearance of a strong future demand and the associated increase in sales and revenues. But, like all capital investment decisions, the investment is made for sustained improvements in revenues and production demands that warrant the commitment of significant resources. The accompanying difficulty is that unlike employees, it is impossible to incrementally increase capacity by adding one employee after another. Plant commitments are considered quantum changes in capacity and not incremental. Therefore, the challenge is not just the general trend estimates but an appreciation of the volatility of demand over a growth period. Outsourcing production especially in the near term is a partial answer to
minimization of risks of a growth trend that cannot be ascertained as continuous. It is a means of shifting the risk inherent in plant expansion to an external supplier and thereby softening the impact of a diminished market condition in the future. In fact, some manufacturers handle growth by shifting an increasing portion of the core manufacturing to external suppliers. The company becomes largely an assembler, able to adjust labor more easily than it can weather changes in productive capacity. Supply chain management does in part alleviate the effects of cyclical swings. Given the exchange of information and realtime communications within the chain, the future intentions as well as the current events of its members become the base data upon which strategic plans are structured. Further, required adjustments within the chain become more precise and in relation to the quality of information. In other instances, when there is a diminishment among the existing customer base, businesses have at times worked to maintain their trend performance by pursuit of other markets. It is expected that these additional customers will restore the trend levels and lessen the fluctuations in sales and revenues. Or, the firm expands its product line to meet the void created in the downturn. A manufacturer of industrial equipment increased the number of dealers when confronted with decreased sales revenue with the expectation that the additional dealers would compensate for a general market deterioration. Certainly advertising in part is a counter cyclical strategy to increase sales. Unfortunately, some businesses budget for advertising according to the volume of sales and as a result actually reduce advertising in a down period, further accentuating a bad condition. Or adjusting prices to attract market demand that may resolve the revenue
deficiency or in many instances aggravate a revenue shortfall even further. CREATIVELY ANSWERING THE CHALLENGE While understanding the generally accepted options to confront fluctuations is fundamental to management, we have found that creative solutions are probably stronger resolutions. Several of the solutions that reflect unusual procedures to address revenue shortfalls and avoid job reductions have included: Sharing employees: MLT Vacations of Minot, ND "loan" employees to Sykes, a computer support firm, for several months and Sykes pays MLT for the use of these employees. Consolidating: To reduce the total corporate overhead, CMF&Z of Des Moines is closing or merging offices resulting in operating efficiencies. Stock options instead of pay: Acxiom of Little Rock traded stock options for the pay reduction required; some employees took an even deeper pay reduction for additional stock options. Paying workers to leave: Venture Law Group is providing a $3,500 monthly stipend to employees who take a public service sector position for a year. Letting employees temp: Talon Digital permitted its employees to take a temporary position elsewhere and still retain their right to return to their jobs at Talon. Fridays off: To avoid losing employees, providing shorter workweeks and even temporary pay reductions as alternatives to employee reductions. (Armour, 2001) These are contrary to the reactionary mentality of corporations: "...many companies, obsessed with sustaining shortterm profitability at the expense of longterm growth will downsize to levels not seen
since their (downsizing) peak in 1993". (Koch, 1999) Beyond the reorienting of employees, look at the unique solution developed by a furniture manufacturer. A manufacturer of high-fashion over-stuffed sofas and chairs bought their coverings from exclusive designers in Europe. The order-delivery cycle was almost 6 months. The fashion cycle in the furniture industry was one year in length. . Because of the sixmonth order cycle, the manufacturer by necessity ordered a full year of fabric inventory; it was impractical to order additional inventory during the fashion year. Therefore, a shortage of fabric resulted in orders that could not be fulfilled. Those fabrics that remained in the manufacturer's inventory at the end of the year were deeply discounted in a secondary fabrics market Regardless of how the manufacturer constructed forecasting models, the consumer market was too fickle and it was impossible to predetermine fabric preferences with any degree of certainty. Given the impreciseness of the forecasting methods, the manufacturer was left with a range of alternatives. Minimum levels of fabric inventories could be ordered that would be nearly exhausted during the year. This virtually eliminated the deep discounting of excess fabrics. Or, at the other extreme, extensive levels of fabric could be inventoried that would virtually assure that all orders could be filled with the preference of coverings of the consumer. However, this would result in significant levels of excess fabric that would be sold for 10- 15 percent of cost. Neither of these extremes was satisfactory. The solution was to build a second manufacturing plant and introduce a second, less fashionable brand but at a lower price. This second brand was the "consumer" of the excess fabric inventories - permitting the high-fashion manufacturer to order clearly
more fabric in total yards than required but to be able to transfer the costs of the excess fabrics to the second plant at a rate of 60-70 percent of costs. The second brand became recognized as high quality fabric coverings but not a leading fashion line of furniture. This solution permitted the manufacturer to respond to the gyrations of demand set in motion by the fickleness of consumers. Where forecasting failed, creativity solved the difficulties. While few solutions could ever follow this design, management must look beyond the normally accepted solutions. CONTRIBUTIONS AND VALUE OF FORECASTING Among business planners and strategists, the importance of forecasting sales and revenue is considered a critical element of going forward. In reference to the airline industry, "...we need to forecast capacity, demand and prices. By far demand forecasting is the most challenging part. Capacity forecast would have been a straight forward exercise if it were not for cancellations and no shows." (Zaki, 2000) In other words, even the best efforts of forecasting in the airline industry is flawed by forces and events (cancellations and no shows) that are external to the industry and beyond their ability to control or, apparently, accurately predict. It should be noted that even with the anticipation of error in the forecasts, the importance of forecasting is not diminished. There is universal agreement among everyone that forecasts are incorrect even as they are prepared. "The trouble with forecasts is that they invariably turn out to be incorrect. Accurate forecasting is a near impossible task as it is impossible to predict all future events and conditions. However, this does not imply that forecasting is a waste of time, but rather that the best
forecasts are those that consistently perform with minimal error." (Brailsford, 1995) The number of available software programs reflects the interest and importance in forecasting. To varying degrees, these programs assist in the process. To the extent that they are able to accurately measure and predict the determinants of demand with accuracy their value increases. However, everyone would still agree that even the most sophisticated of these programs can only approximate the future and that the unknown and unpredicted gyrations of demand will still haunt the business. The question of the future is critical to the small business. "What are the biggest threats and opportunities entrepreneurs face in the marketplace? ... what does the future hold? ... The world of small companies is constantly changing. The job of the entrepreneur is to figure out what might be around the next bend in the road." (INC, May 2001) This same theme was the opening line of the report of the 1995 White House Conference on Small Business. "Small business has never been more diverse or more vigorous, propelled in large part by fast-paced change in almost every aspect of American life and the opportunities that change generates." (USSBA, 1995) Given the inevitability of a changing environment for small businesses, the experiences of the past as predictive trends and events of the future are not sufficient. Indeed, the momentum is not a guarantee and certainly these past trends do not identify the nuances and gyrations of the future. There is a defined need for businesses to have an understanding of future conditions. This intelligence and information might be derived from several sources including commercial reports, words on the street, and forecasts. The distinct advantage of the forecast is its orientation to
the specific business and the characteristics of that business. Forecasting requires substantially more than either trend projections or compiling unsubstantiated estimates of the future. As several authors state, "Industry foresight must be informed by deep insight into trends in lifestyles, technology, demographics, and geopolitics, but foresight rests as much on imagination as on prediction." (Hamel and Prahalad, 1994) However, we must use extreme caution in forecasting. "Bad forecasts wreak havoc in a company. Without a [reliable forecast], your forecast is just an empty prediction that neither you nor anyone else can count on, and that is almost certain to create problems for you down the road." (Stark, 1997). Regardless, the requirement to forecast remains. The difficulties in forecasting are the changes in those factors that were fundamental to the prior performance of the business, especially those factors that are external to the firm. "The accuracy of your forecasts will be determined to a large degree by how much patterns and relationships change, and how much people (including the organization itself and its competitors) can influence future events." (Makridakis, 1990) As Olson and Carey state: "The critical elements of change ... combine to produce an environment of intense change - an environment of immense uncertainty and challenge for your business". (Olson and Carey, 1985) The presence of the difficulties of forecasting does not dismiss the importance of forecasting. "The need for forecasting is increasing as management attempts to decrease its dependence on chance and becomes more scientific in dealing with its environment.." (Makridakis, Wheelwright, and Hyndman, 1998) Insight of the future will diminish the effects of the nuances and gyrations of sales and revenues and reduce
the impact of these crisis events in businesses. There is some confusion among authorities regarding the characterization of scenarios as a planning and forecasting feature. Information on the nature of sales "...can be used to forecast gross revenues. Several projections should be prepared by changing some of the assumptions - in particular the number of customers. At a minimum there should be best, worst, most likely and a break-even forecast." (Montero, 1994) However, to clarify the true nature of scenarios, there is a clear separation of scenarios from forecasts. By taking the prior history of a business as a reference, the construction of the future is considered a 'reference scenario'. "These reference projections that turn out to be revealing can be combined with the outputs of the system and obstruction analyses to form a scenario of the future that the organization would be likely to have if its behavior and that of its environment were not to change in any significant way... In effect, the reference scenario is a prospective history of the organization" future out to the horizon. Remember that this is not a forecast of that future."" (Ackoff, Gharajedaghi, and Finnel, 1984)
SUMMATION AND CONCLUSIONS It is impossible and untenable to believe that businesses will resolve the fluctuations of sales and revenue to any appreciable degree. Those gyrations will forever be a condition of business enterprises. However, reducing the element of surprise and improving the responses to those fluctuations have the potential for lessening the affects on the individual business. Any improvement in forecasting will provide management with enhanced information of future conditions and enable them to better prepare for those events. Even improvements in general trend forecasting are beneficial. However, what management must look for are methods and models by which the prediction of even minor changes of sales and revenues are possible. Given changing dynamics, management must become familiar with the ranges of options that are possible. Finally, management must be open to examining creative avenues to solving the common problems of revenue fluctuations.
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