As an entrepreneur, it’s safe to assume that you are already familiar with the art of financial forecasting and modeling. It’s probably a part of your investor deck or board presentation — whatever the form it may be in, it surely does exist.
2020 has been full of disruption to many businesses, and business owners are looking for ways to ensure that they are not only able to weather the storm, but are able to emerge from it in a position of strength and capitalize on future opportunities.
In this blog post, I’ll highlight certain considerations as you factor the new realities into your growth prospects for this year and beyond.
Financial forecasting in this climate is certainly no walk in the park. That said, having a robust financial model is a really good tool to help you compartmentalize your business levers, and it helps you identify key variables that can be flexed in a time of deep uncertainty.
How do you do it? Here’s a brief overview:
1. Develop a Robust Financial Forecasting Model
It’s imperative that whoever’s in charge of the finance function in your company refine their forecasting capabilities to help prepare for future impacts and opportunities.
No matter how good your financial model was before COVID-19, I’m pretty confident that it wasn’t built to capture things like reducing revenue to zero, temporary government subsidy programs, or rent abatements from your landlord. That’s why having a model that’s flexible, and allows for significant sensitivities is very important at times like this.
Moreover, your business has developed its Key Performance Indicators(KPIs) over time, that it monitors and reports on a regular basis.
It’s no secret that certain sectors such as travel, tourism, entertainment, and retail have been more significantly impacted relative to others. Hence, your company’s sector, geography, and resources will determine the KPIs for this period. Some CEOs may take a defensive approach by preserving cash while others may be on the offensive, looking for organic or inorganic growth opportunities.
Thus, you need to update your KPIs so your financial model is able to capture and monitor these in a relevant and accurate manner.
Let’s also not forget that whatever key inputs you put into your financial model, they are likely to change so you need to take this volatility into account.
Key questions you need to ask include:
- How should you manage staffing capacity if your business has been significantly impacted due to Covid-19?
- In what way do you look for unique acquisition opportunities while paying attention to your organic business growth and prospects?
- How do you manage your monthly cash burn? Are you developing/maintaining a big enough war chest to properly invest for your company’s future?
2. Supplement it by Creating Multiple Scenarios
Let’s put it simply.
The more homework you do right now, the better prepared you are.
We don’t know what might happen next month, but, once we do, we need to be able to quickly incorporate that into our projections, to ensure we’re making well-informed decisions.
- Current Scenario
- You should first check your current financial model and use it as a base for further scenarios. In case you don’t have a model at hand, your first priority should be to build one. You need to assess your current business plan and develop a recovery plan based on it.
- Best Case Scenario
- This scenario seems impractical considering the circumstances but hey, stranger things have happened.
- Probable Case Scenario
- This is where you need to put your thinking caps on and integrate all possibilities into your model based on your judgment. I know that’s easier said than done but hey that’s what experts are for. But more on that later.
- Worst Case Scenario
- I’m pretty sure no one wants to anticipate this scenario but you have to prepare for the worst.
Even in a stable environment, good financial forecasting & modeling is no easy task. So you can imagine the complexity of doing it during this pandemic.
This is where I’d like to shed some light on Trivium Global’s approach to financial forecasting & modeling.
I can’t stress enough how lucrative the value of good guidance in developing financial forecasts and models is, especially in an environment as precarious as this.
Our team brings years of successful projects and a refined approach to the table. We elucidate all aspects of the business in our models and help your company adapt and thrive in ever-changing market conditions such as the one we are facing right now.
I encourage you to have a look at some of the work we’ve done with our clients.
You should first try to assess the impact of these changes on your revenue and expenses based on the guidelines I’ve discussed but whenever you get stuck…
We’re just a message or a call away.