By John Supan
Today’s COVID-19 pandemic and its associated job losses are only some of the worrisome issues facing us in 2020. Other current societal challenges include racial injustice, health care system inadequacies and the ever-present effects of climate change. The impact of all of these occurring simultaneously only add to the uncertainties inherent in an election year.
While the current environment may seem unprecedented, it’s really not. Most seasoned professionals will readily recall other sudden downturns, 9-11, the 2008 mortgage crisis recession, and the 2000 dot-com upheaval – among others. Now is the time to revisit the important lessons learned from prior crises and then build on those lessons to address today’s realities. Pro-active companies are always better able to withstand challenging times and their success and longevity attest to this. And remember, eventually all crises subside. This one will too.
Companies today still need to manage their operations, identify new financial controls, develop assumptions which drive forecasts, and make investment decisions so that they can maximize performance – despite current circumstances. They must continue to pursue their best opportunities to flourish and build shareholder value (or at a minimum, at least safeguard against a precipitous decline).
One of the most critical skills in uncertain times is the ability to accurately make assumptions about the future – however ambiguous and volatile the environment. All CFOs know this because we are always in the driver’s seat when it comes to monthly, quarterly, and annual forecasting. After many years leading the Finance charge in the C-suite, I believe that financial forecasting should be viewed as both an art and a science. There is no question that experience will always be able to color whatever the models predict. Not everything always comes down to just the numbers.
Here are 7 tips for better financial forecasting in uncertain times…
- Act now. Move fast to develop your point of view. Delays are costly and indecision can cause others to rightfully question your leadership abilities.
- Prioritize your core business. Re-evaluate your core competencies – protect your core business and continue to do what you do best.
- Employ a “zero based budgeting” approach. Resist the temptation to modify an existing past plan. It’s now imperative to start from zero and build your new plan to include real, actionable, revenue-supported outcomes – for today and tomorrow.
- Preserve cash. Defer capex spending unless needed to “keep the wheels” on the business. Long term expenditures are not appropriate during a short-term cash crisis. Use working capital wherever possible – delay vendor payments and accelerate customer collections. Keeping working capital low is equivalent to an interest free loan. Not managing this closely expends critical cash needed for the business. Spend your cash like it’s the last you’ll have because it might be. And resist the temptation to proceed unabated with prior long-term pet projects. If you don’t survive the short-term, there will be no long-term to worry about.
- Look for new opportunities, but only if readily actionable, as a delayed timeline to implement is too costly on your cash reserves during a time of crisis.
- Remain flexible. Your revised forecast will need further modifications as business conditions continue as they are, worsen, or improve. You won’t get everything right the first time and that’s okay as you’ll learn as you go. Be ready to pivot with several what-if scenarios so you’re not starting from scratch. Build your financial models with changeable variables so that you can toggle the assumptions as you need to.
- Communicate and be open and honest about the implications of your forecast with stakeholders. No surprises! Plan for the extra time needed to communicate and don’t put it off as unnecessary just because you’re running the business. If you’ve enlisted the support of others, they deserve periodic updates. Here are some specifics by audience:
- Management team: No spectators allowed; all team members must embrace and own the plan. Begin with a full, all-hands working session and keep going until it makes sense. Then assign date specific responsibilities to each of the team members. Frequent updates and progress assessments need to occur with full participation. Deviations, delays, and missed commitments are not acceptable and each person must remain accountable to the entire group.
- Employees: Engage with everyone and act quickly and decisively. Now is the time to cull non-performers (if you haven’t been vigilant already), repurpose certain others and seek to get full commitment from critical top performers. Retention of your “A team” is critical to your success so consider all employment decisions thoughtfully.
- Customers: Are you meeting their needs? Can you modify your products or services to better serve them? Talk to them as their support is your recurring cash flow lifeline.
- Investors: Gauge their appetite for risk and their capacity to invest more if needed. Provide routine updates to keep them informed and build their confidence in your ability to succeed. Seek new investment if available.
- Lenders: Seek an honest dialog as to how you’ll continue to meet financial obligations and request concessions if needed, including a freeze on your loan amortization repayments or even the possibility of additional funding. If the terms are reasonable, take the cash if it’s available.
- Vendors: Your vendors are also at risk and want to know that you’re working with them. If payment term extensions can both assure your continuance as a customer without a payment default to the vendor, then both parties win. But this takes open, frequent dialog.
And finally, business adversity mandates sound crisis management. This may start with the CEO, but it’s closely held also by the CFO and entire leadership team. It is also an opportunity for realistic and committed companies to not only weather the storm of a downturn but to come out stronger once the business climate improves. Importantly, group cohesion during a crisis always gets a tremendous boost after successfully prevailing in spite of daunting challenges.