Next to preparing the annual budget, the exercise that many CFOs dread most is creating a five-year plan. The document can take months to craft, is impossible to get right, and generally becomes obsolete within six months. Why, then, are companies still wedded to it?
The answers are varied. Some CFOs, especially those at capital-intensive companies or municipalities, produce five-year plans to support bond issues or other long-term capital financing. Others do them simply because their bosses want one. No matter why they do it, however, CFOs agree on one thing: after year two, it’s all guesswork.
“For some reason, the best year is always the fifth year,” laughs Jim Bell, director of corporate finance at Huntsman Corp., a petrochemical maker headquartered in Houston. “Truthfully, once you get out past two years, it’s so fuzzy that it’s fairly meaningless.”
Bell has done a five-year plan approximately every four months for the past year and a half, even before the privately held company defaulted on a bond payment and had a change of investors. He and his finance team have gotten so good at creating the plan that he says it now takes them only two to three weeks to complete the next version. “We’ve had all the big consulting firms in here in the past year representing potential investors, and they all want a five-year plan,” Bell adds.
Oddly, even the lenders that demand the plans acknowledge their fallibility. “There’s a high degree of uncertainty the further out you go,” says John L. Daniels, senior vice president in the commercial-banking group at Bank of America Corp.
Uncertainty notwithstanding, BofA still requires that companies produce forecasts that cover the duration of nearly any loan they request. “We’re obviously asking so we understand the risk of a deal,” says Daniels. “We’re looking for the cash-flow perspective and how we’re getting paid. We build our loan agreements and covenants on that information.”
Dead or Alive?
While five-year plans may be a great tool for banks, many CFOs think they’re a big headache and will jettison them at the first opportunity. That’s what Dawson Cunningham, CFO of Akron, Ohio-based Roadway Corp., did in 1996 after his company was spun off from its parent. Roadway had no debt until 12 months ago, so it could easily drop such plans, says Cunningham.
“[The parent company] required that we do detailed five-year plans that contained, basically, a lot of text outlining goals and the financial forecasts relative to operating results,” recalls Cunningham. He thinks the document, which took two months to complete, was useless. “The problem with a plan is that it gets put on the shelf,” he says. “It’s not a living document.” Today, Cunningham leads Roadway through strategic-planning exercises on an “as-needed basis.”
“We’re heavily driven by the economy and cycles that we can’t forecast,” he notes. “We’ve found that the best thing to focus on is not the process of creating a five-year plan, but the process of creating benchmarks, and reviewing your progress against those benchmarks.”