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Scenario Planning: Building Financial Forecasts in the COVID-19 Era

The way that you build your financial forecasts has likely changed in the last year. It likely had to. These turbulent times have left few companies unaffected. 

The assumptions you used to make your predictions on are likely outdated. The numbers you need to look at have changed. Your ability to look at what has happened now and make accurate assessments of your future needs is shifting from a good practice to a mission critical step in staying afloat. Right now, your business needs to be alert and agile, and having accurate forecasts is an important tool to make that happen.

Adjusting Assumptions

Adjusting the assumptions that you make on your forecasts will be the most significant adjustment to make now, in the middle of the COVID-19 era. The chances are negligible that your business wasn’t affected at all by the events that happened this spring. Whether they put you in financial jeopardy or presented an opportunity depends on the industry you are in, but regardless you need to take them into account moving forward.

The first step is to clearly identify your assumptions. There may be some you have been making subconsciously, or there could be some biases to root out to get a clear view of how your business is doing. Making assumptions is part of forecasting, it is one of the tools that make predictions possible. The assumptions you make can be your strongest assets, or your greatest weakness. Which way that truth swings depends on how accurate these assumptions are. 

You need to take a realistic look at how your industry is fairing the pandemic. You need to know for sure what the outlook is for the next year. You need to know how much the market is likely to grow, shrink, or shift. You need to know how your competitors are changing, and how technology is likely to disrupt your old business practices.

When things are stable, it may be good enough to guess. But today, when so many industries are in flux, hard numbers need to be backing every assumption you make.

Look at the numbers

Look at your income statements, balance sheets, and cash flow statements from this volatile time to help you develop a new best- and worst-case scenario. Take a hard look at your customers, and analyze which ones are doing well and which ones are struggling. Those same customers are likely to continue to have troubles in the near future. 

However, as time continues customers in similar industries may start to feel the strain too. They may have gotten aid in time or had the capital to weather a couple bad months, so they were able to continue timely payments and retain your services. However, as this crisis drags on, that may change. 

By looking at industry trends, you will have a better estimation of any shortfalls you will likely encounter if market conditions worsen. By looking at which customers have been late on payments or unable to continue buying your services, you will see which ones are likely to continue struggling.

Are you using the same sales process now that you did in the first quarter of this year? With such volatile changes happening across the board, the likelihood that the same sales funnel will generate the same results is miniscule. Don’t just reevaluate your top-line number. Every step of your funnel needs a reality check.

  • The total addressable market in your area has likely changed
  • The percentage that can be reached through marketing won’t be the same
  • The most valuable niches and industries to target could have shifted.
  • Each of your marketing channels won’t be having the same results. With in-person channels actively blocked, other forms of outreach may be getting flooded, so your conversion rates may be taking a hit.
  • As things tighten up, a potential customer may need more convincing before converting, raising Customer Acquisition Costs.
  • Customers are likely to spend less, lowering your Customer Lifetime Value metrics.

Don’t just focus on your numbers either, take a look at your competitors. Compare what you are seeing with your industry. If some of your metrics are well above the industry standard right now, your worst-case scenario forecast should assume an adjustment towards the mean. Diving into why you are doing better or worse than the competition will give you insights into your current strengths and weaknesses.

Pay close attention to how key ratios have shifted in the last few quarters in key metrics like gross margins, revenue per square foot, total headcount per customer, and other specific to your niche.

Making a plan

After you have adjusted your assumptions to reflect the current market, start making a plan. Don’t assume those assumptions will remain static, however. Just like things have shifted dramatically this year, they are likely to shift again before a new normal is established. Continually reassess so that you will be ready to pivot when the time comes.

Make a plan that identifies your potential shortfalls and shores up your budget to compensate. You want to have a clear view of your current cash flow. That means not only knowing exactly what your billing looks like every month, but clearly seeing how promptly you are receiving payment. 

With everything laid bare, you will be able to identify where you need to adjust your budgets, where you can expand your business, or where you may need some financing in the future. The sooner you are able to identify your needs, the faster you are going to be able to fill them.

Deploy capital confidently

Having the ability to see what your company needs to take advantage of growth opportunities and avoid disasters is paramount. Knowing what gaps, you are most likely to have and developing the strategies to fill them will be critical in the coming months. As everyone tries to determine how best to move forward, accurate financial forecasts will allow you to deploy your capital with confidence. If you want to make your forecasts more accurate, easier to make, and deploy multiple models for every possible scenario, then consider using Dryrun. Talk to us today or start a free trial to start taking care of your company’s future.

See if Dryrun is a fit for you.