4 Tips to Forecasting During Uncertain Times
Written by: Anthony Mancuso, Data & Analytics Professional
It is more important than ever for businesses to have a robust financial, planning, and analysis (FP&A) function during these uncertain times. One way to maintain this is leveraging data and analytics. A very wise man named Yogi Berra once said “the future ain’t what it used to be.” Financial analysts know exactly what this means. Top-performing finance teams are constantly looking forward and shaping the future of their businesses. Whether preparing for probable market changes or adapting to unexpected ones, strategic finance leaders are veterans at business planning in the face of uncertainty today and tomorrow. But, as almost every finance team large or small is experiencing today, some periods are much more uncertain than others. When you’re expected to plan for anything, but you can’t plan for everything, it’s understandable if you’re feeling some added pressure these days. In addition to rolling out business continuity plans, finance leaders all over the globe are now asking themselves, “How can we factor today’s uncertainties into our five-year plan without compromising revenue targets? How can we plan for the next 60 days? What operational changes do we need to incorporate into new plans, whether for survival or continued growth? How can I help my business adapt to current uncertainties and better prepare us for future ones?” Successful uncertainty planning ultimately comes down to being able to quickly revise financial and operational plans by leveraging your data and analytics capabilities. Here are 4 tips to successfully forecast during the uncertain times of today.
- Seize Opportunities for Scenario Modeling
- Cash is King – Especially Today But Really Everyday
- Adopt Agile Forecasting
- Leverage People, Process and Technology
Seize Opportunities for Scenario Modeling:
Every uncertainty you face is an opportunity to dive even deeper into your numbers and estimate future outcomes with scenario modeling. Seismic market shifts or a global pandemic are obvious event-driven examples where you would want to assess possible futures. Scenario modeling involves testing the implications of your business plans against assumptions about existing and future scenarios and making agile models to assess the impact of those plans on things such as revenue, costs and cash flow. When planning for your business in uncertain times, levers to test could involve operational steps to weather cash crunches such as headcount planning. In that case, your scenario models should answer questions such as:
- How sustainable is the business’s cash flow if we stick to our existing hiring plans?
- What are the implications on the business’s cash flow if we are awarded or denied a CARES Act related loan or debt relief option?
- What key roles or types of roles (e.g. executive hires, roles that work well remotely) can we maintain without adversely affecting our cash flow situation?
- How can we adjust compensation plans fairly to lengthen our financial runway?
- What other hiring plan changes can we make to maximize performance while minimizing cash flow implications?
A higher education institution was looking to become more sophisticated with their strategic planning. They wanted to upgrade their current simplistic model. We first completed a data assessment to understand all of the variables and data components that would be necessary to develop a fully integrated and variable model capable of scenario modeling. It was discovered that the data lived in silos within many different departments and systems. We were able to collect and combine all of this information into an integrated model built in Microsoft Excel. The model was then injected with business intelligence so efficient scenario analysis could be completed by simply changing the pertinent input variables. The variable inputs were items from enrollment to staff headcount to debt service. By creating an integrated, variable model the institution was able to more efficiently strategically plan all with the confidence that the data was recent and accurate.
Scenario modeling is an effective way to hone in on critical metrics and their impact on your business results, arming you with the insights you need to make tough decisions quickly and confidently. Doing it well is a combination of picking the right variables and business drivers to test, and combining key performance indicators (KPIs) from across your business to see the direct implications of adjustments to those variables. An organization is only able to efficiently develop these models when they have their data infrastructure in place and leverage the proper technology. Any model used should be grounded using validated data to ensure accurate as possible results.
Cash is King – Especially Today But Really Everyday:
Small to medium sized businesses may be able to stay on track to meet growth targets even in the most uncertain times. But every finance person is also directly responsible for ensuring the business has enough cash on hand to weather those downturns and periods of uncertainty. From taking on additional debt to putting a hold on new hires, it’s on finance to quickly make the tough calls needed to keep the business operating under any market condition. In periods of uncertainty more than any other, effective cash management is the difference between weathering a storm or being sunk by it. So scenario modeling around cash flow is a natural priority, but other important things to consider include:
- Assessing your cash flow on a more frequent basis – monthly cash flow statements don’t cut it when you need to understand immediate impacts. In uncertain times, your cash situation should be assessed on a weekly basis, if not more frequently.
- Examining all the levers at your disposal – ensure your business is sufficiently funded, including accessing additional credit and changing your accounts payable procedures or major decisions around hiring and headcount.
- Providing management with dashboards, data, and other analytics (e.g. involving HR in the case of headcount decisions) so they’re part of the decision-making process and appreciate the role cross-functional collaboration plays in the overall success of your business.
Adopt Agile Forecasting:
In uncertain times, companies need to be able to identify key performance trends on demand and modify their plans quickly based on agile analyses of how market conditions today will influence their bottom line. Unlike static annual budgets which are tedious, manual and rendered obsolete the moment a change is made, rolling forecasts give business leaders a reliable prediction of long-term company results based on real-time actuals and business drivers. Agile forecasting takes the rolling concept a step further—not relegating reforecasting frequency to quarters or months, but being able to reforecast on the fly. Being set up for rolling forecasts will certainly help you prepare for agile forecasting, but it’s not necessarily a prerequisite as long as you’re set up to quickly and easily:
- Use historical data and your most recent actuals to guide reforecasting.
- Reforecast at a frequency that makes the most sense for the purpose at hand—quarterly may suffice for large, operational expense items, but for cash flow and headcount, a weekly cadence is more suitable under current conditions.
- In part through scenario modeling, the impacts of tomorrow on decisions you need to make today.
Even under the most predictable conditions, agile forecasting gives companies the ability to identify new growth opportunities for the business. In times of uncertainty, it’s among the best ways to adapt your business quickly, consistently and intelligently to unexpected changes in market conditions. Economic downturns represent an opportunity for businesses to not just stay afloat but to actually grow if they have these analytics strategies in place for their FP&A function.
Leverage People, Process and Technology:
It’s important for small to medium sized businesses to leverage technology, deploy tight processes, and to lean on resourceful talent within their FP&A function to drive smart, agile planning decisions across the business. Features of this include:
- Data Accessibility – combining internal and external, financial and non-financial data into a single source of truth that stakeholders can easily access for a full view of the business and levers that can be pulled for a quick pivot.
- Data Analysis – financial modeling is best done in a technology like Microsoft Excel. Excel provides the greatest flexibility for scenario modeling and also has data visualization capabilities.
- Data Visualization – there are many technologies available for telling a story with your data. However, technologies like Microsoft Power BI and Tableau are even more. They can be used to provide data storage, transformation, aggregation, analysis, and visualizations. Ultimately, using the data visualization aspects of the technology allows you to turn data into insights on performance that can be presented to management in a way they easily understand and can quickly put into action.
- Tight & Streamlined Process – deploying tight processes around the capturing, storage, and aggregation of data is necessary to make thoughtful business decisions using financial forecasts.
- People – lean on resourceful individuals that are able to combine their technology skills while being grounded in sound financial management principles to develop solutions.
One example of leveraging people, process and technology, was when we were approached by a construction services organization to develop their FP&A reporting function. The company was currently using Google Sheets to track all of their operations and was using QuickBooks for their financial reporting. They needed a way to get a holistic view of their business from a financial standpoint. The first step in the process was to implement a new data infrastructure by integrating the Google Sheets and QuickBooks data into Microsoft Power BI. This allowed us to develop dashboards for them to complete with data visualizations to provide data analysis capabilities for them to make better financial decisions. Using the information gleaned from the dashboards, the organization implemented a new bonus and commission plan for their reps which led to higher retention. They were able to be more sophisticated in their compensation plan because it was automated within Power BI and tied back to QuickBooks. Finally data management and governance processes were devised and implemented to ensure the utmost accuracy. The solution delivered on all of the aforementioned features above and allowed the organization to make sound business decisions and grow. The business ended up growing their top line revenue by almost 30% year over year post implementation.
Working together, these capabilities make the processes covered above, scenario modeling, agile forecasting and cash management, systemic and scalable. They also help to enable integrated business planning with easier cross-functional collaboration and data discovery, ensuring that you can collaborate on high-level KPIs and departmental budget numbers and ensure your core business strategies remain a north star in your planning efforts. As part of your integrated planning efforts, your team should have the means and first hand exposure to be able to look at scenario modeling, cash flow and agile forecasting with a big picture view of your entire business and how a change in one decision will have cascading impacts across the company. In short, the right people, processes and technology are all required to become an agile planning company that can navigate uncertain times.
The four best practices above are essential items to have in your company’s toolbox for planning with agility and adapting to uncertainty. Contact ProNexus today for a free consultation on how we can help your organization navigate these uncertain times.