Forecasting the Unpredictable: Strategies for Stability
With the recent disruption of “normal” business, leaders have been searching for new ways to adapt to dramatic changes in their forecasts and budgets. As we transition into the new normal, it is simultaneously more challenging but more important than ever to quickly adapt our forecasting strategies. Below are four approaches to forecasting that provide stability in both the near and long term as we approach this transitional period.
New Lenses for Expense Management - While one’s knee jerk reaction might be to say that it is impossible to forecast anything right now, there are still some methods we can fall back on to help guide the way forward. In the near term, applying a new lens to expense management is key. Expenses should be reviewed as either discretionary or non-discretionary to help make decisions in what tools we continue to employ going forward.
Conservative Quarterly Forecasting - A conservative 13-week forward-looking forecast, with an emphasis on contracted collectable revenue, still proves to be an invaluable tool. Looking ahead a full quarter will allow you to identify any possible cash shortages early on and manage funding sources more efficiently. A weekly review of your accounts receivable is also critical, as it will help to identify sources that might prove problematic based on the market.
Simulation-based Forecasting Models - While the above suggestions are great tactical tools that prove useful no matter the market conditions, what about when we start to look further out? While it might not be your first thought in a finance setting, taking an approach similar to storm forecasting models did prove useful during the 2008 financial crisis recovery. Building dynamic forecasts that are more simulation-based, as opposed to your typical linear models, can allow you to plan for multiple endpoints.
Simple Scenario Planning - Lastly, simple scenario planning should not be discounted. We are now a few months into the economic disruption and have some data on the impact it is having on our businesses. Worst, likely, and best case scenarios can now be more accurately identified even though the data is limited. The key here is to treat this forecasting technique like you would a startup that has limited financial history: plan conservatively with a cushion in expenses if possible, review monthly, and re-forecast quarterly at a minimum.
Putting it all together
Employing the above techniques correctly can help stabilize your outlook, as their accuracy and value will only improve as more information becomes available. While challenging and rigorous, forecasting can still be utilized in today’s market to craft targeted, strategic decisions around the challenges of the new normal.
For more information on forecasting strategies, please contact Navigate CFO Services.