Having a robust financial forecast is an important tool during a time of crisis, significant change or uncertainty. Management teams must be looking forward at what might play out over the coming weeks and determine the likely cash flow or funding ‘run way’ available to make key decisions.
It is easy to get it wrong with forecast models that are not ‘fit for purpose’, functional or built up with assumptions that align with Management’s strategic options.
Outlined below are key principals that Management teams can use as a guide when instructing the business to develop robust financial forecasts to help navigate through the COVID-19 crisis.
- Simple – Complicated forecast models are not practical in a rapidly changing environment. Following a traditional model structure – inputs, calculations and outputs – will make it easier for third parties, such as lenders or their advisors to review and understand.
- Dynamic – Forecasts with clearly articulated assumptions that are simple to update, review and adjust for different scenarios.
- Strategic options and scenarios – It is important to understand and model the impact on cash flow and funding requirements under varying scenarios of revenue, margins and costs. Setting out different strategic options helps to understand the range of potential outcomes and timing of impacts.
- Start with what’s known – Some costs should be predictable and are a logical starting point for any forecasting exercise. Consider what can be removed, deferred or reduced, particularly in situations where revenue has fallen.
- Translates to cash – The forecast should translate earnings into cash through modelling the working capital, financing and other balance sheet movements. A robust approach to this is essential to ensure that all liabilities are correctly captured and to provide greater confidence in the cash flow projections.
- Funding requirement – Determine the expected ‘funding requirement’ under the various scenarios and options to mitigate funding concerns through negotiating discounts, deferrals or temporary extensions to trading terms with suppliers.
- Weekly, or daily if cash is tight – It is important to look at intra-month information in situations where cash flow is tight. At least for the short-term, weekly (and sometimes daily) forecasts will give you the extra level of detail required to better understand the timing of peak funding requirements, and to closely monitor actual performance and allow for faster decision-making.
- Comparable – Integrating forecasts with management reporting will allow for an easier comparison of actual and projected performance. It is helpful when stress-testing assumptions under different scenarios and when measuring performance or cash flow against recent run-rates.
- Actions – Following the assessment of each scenario and management determining short and long term objectives, it is critical that actions required by the business be implemented and accountability maintained through reporting channels.
The challenge in navigating through a period of uncertainty is to be able to quickly adopt practical measures and consider broader industry and market factors that can assist management with its decision-making. Being able to access the insights from what we are seeing across different industries is valuable and provides the independent lens to assist management and test assumptions.