Key considerations when forecasting now
- Customers’ financial situation
- Changes to customers’ buying patterns
- New government mandates
- Technological disruption
- Supply chain developments
5 minute read
Accurate financial forecasting has always been essential to making well-informed decisions on business strategy. But in today’s extremely challenging business environment, many executives find that anticipating their company’s future performance is more difficult than it ever has been.
For many, past performance is no longer a reliable indicator of what will happen in the future. In fact, ongoing uncertainty is the most difficult aspect of running a business in the current environment, according to 66% of executives at middle-market firms surveyed by the National Center for the Middle Market in June 2020.
Against this backdrop, many firms are modifying methods they use for forecasting to take into account rapidly changing markets and circumstances they have not previously encountered. This is helping them to make more informed decisions about personnel, facilities, financing, new business opportunities and mergers and acquisitions activity. “A forecast now has to be a living document,” says Richard Veltre, CPA and owner of the Harbour Rock, a business advisory group. “It is much more dynamic than it used to be.”
It also helps to give your partners — such as financial institutions and investors — the information they need. To make decisions on financing right now, banks need to see an integrated balance sheet and forecasts for sales, cash flow and receivables, according to Craig Fine, a CPA, who works with the food and beverage sector for Mazars USA. “Focus on the numbers that drive your business,” he advises.
Addressing the following questions will help you determine if you need to adjust your forecasting methods to make your predictions more accurate and useful.
Many companies that have previously relied on 13-week forecasts are now actively making 52-week projections that they update every month or quarter, depending on factors such as the economic outlook and the rate of coronavirus cases. A good rule of thumb is to forecast for 20% of pre-crisis revenues this year, then update your forecasts every month or quarter, based on relevant variables, according to Veltre.
In the present environment, many companies are integrating new scenarios and variables into their forecasting to take into account conditions they haven’t encountered before.
In the B2B space, some firms are finding that the internal structure of the companies they serve has changed to adapt to the ongoing coronavirus situation. With new decision makers and departments involved in purchasing, they must update their assumptions on buying patterns.
Others are finding that they must adjust their forecasts to account for the changing financial situation of once-stable clients. One commercial real estate firm that owns about fifteen Class A office buildings, for instance, had to forecast the likelihood of its tenants’ industries being hurt by the coronavirus pandemic for a sustained period when it was deciding whether to extend the terms of their leases. The goal was preventing losses from nonpayment. “Most of the clients it was dealing with weren’t small,” says Veltre.
At the same time, B2C companies may need to adjust forecasts to take into account government decisions on health and safety that affect consumers’ use of their products. One national lacrosse equipment distributor that normally brings in $15 million in annual revenue saw an 80% decline in sales after stocking up on inventory in early spring, just as the coronavirus situation came to a head and competitions started getting cancelled. The company worked with Veltre to develop forecasts that take into account its higher inventory levels and agreements with manufacturers to sell the goods at full price. They also weighed factors such as the number of states that are allowing fall sports in 2020, the rate of participation if coronavirus cases go up or down, and the probability of a 2021 spring lacrosse season. That enabled them to come up with a more accurate forecast, adjust their purchases from vendors and conserve needed cash. “If you’re not considering your level of inventory, you will throw off your final balances,” says Veltre.
In the healthcare industry, many facilities that were not permitted to perform elective surgeries during the height of the coronavirus situation have now resumed them. To anticipate future revenues, they have prepared forecasts that take into account multiple levels of patient demand that fit new industry-specific patterns that are emerging, according to Marc Lion, a partner and advisor in entrepreneurial business services at the accounting firm Mazars USA.
For instance, in fields such as dermatology, plastic surgery and medi-spas, many providers saw a pattern in which there was an immediate surge in appointments after opening their doors post-lockdown, but then a drop-off in this pent-up demand. Many have now been operating consistently at 70% or 80% of pre-coronavirus levels. “We’re trying to identify a realistic suite of actions to develop a newer and operational financial plan,” says Lion.
Healthcare companies are also including harder-to-predict variables related to consumer behavior, such as patients’ readiness to schedule appointments and the preference of some patients for telemedicine, given that rules for billing and collections are different than those for in-person care. “Some businesses may be open to the public, but the public may not be ready to come in,” says Lion.
In the present environment, the quarterly market research reports and insights from thought leaders that many companies use to frame their forecasts may become dated more quickly. To gain an understanding of emerging trends, sign up for real-time market intelligence reports from your financial provider. Many CPAs also recommend that clients step up their own on-the-ground research. They advise speaking frequently with vendors and suppliers — particularly those who serve many companies in your industry — as well as customers. Sales people can also provide a valuable ear to the ground.
Having more regular conversations with your supply chain can pay off in ways that may bolster cash flow. When one of Veltre’s clients, a food importer, determined from its cash flow forecast that it could not afford to order inventory from a regular supplier in Greece under its existing payment terms, it suggested a payment plan that included a cash-on-delivery component. “The vendor said, ‘You are the first person who came to us and talked about this,’” he says.
With the need for rapid-fire forecasting increasing, more companies are turning to “connected planning” forecasting tools that enable them to create forecasts within minutes, sometimes within a meeting, by utilizing artificial intelligence and machine learning, according to Ron Dimon, a former Deloitte executive who is now a business advisor and author of the upcoming book, Connected Planning: A Playbook for Agile Decision-Making.
“If a tariff goes up in China, with the click of a button you can create more scenarios,” says Dimon. “This kind of functionality allows you pivot to a functional plan almost instantly.”
You can use some of the new tools to get automatic cash flow projections based on scheduled transactions, such as new sales, and set cash-flow thresholds so you are alerted in enough time to make proactive adjustments. You can also tap into data from outside your industry using machine learning — a useful feature if you have added a new in-demand product with a brand new supply chain to meet market demand, like one cardboard box manufacturer Dimon advised who began selling hand sanitizer and masks.
“Tools designed specifically for cash flow can be particularly useful right now, when many lenders find that metric to be more important than any other,” says Veltre. He finds lenders can be most helpful when forecasts are “reasonable” and “conservative.”
Right now, forecasting may be more of an estimate than ever before. But making forecasts as accurate as possible can still help you plan, whether or not you build up or step back.
Ron Dimon | Connected Planning Advisor, MRWD, LLC
Craig Fine | CPA, Office Managing Partner Long Island, Mazars USA
Marc Lion | Partner and Advisor in Entrepreneurial Business Services, Mazars USA
Richard Veltre | CPA and Owner of the Harbour Rock
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