Over the past couple years, businesses have endured frequent and dynamic uncertainties. Be it the US-China tariff wars or the Covid-19 pandemic crisis that has crippled economies alike, the effects on businesses are widespread and transcend size, industry, and profitability. It seems that the overwhelming sentiment these days is despair. However, don’t fret – anticipating the impacts of these changes through dynamic and frequent forecasting is the best “insurance” against poor outcomes. Being able to discern how customers and vendors will react in the midst of any change in circumstance (and the effects on an enterprise’s costs) makes forecasting especially challenging during uncertain times.
Forecasting helps estimate the efforts and identify important focus areas during challenging times. For example, forecasting reveals answers to the following three essential questions during a downturn:
- Identify your margin of safety: At what levels should the business operate so that it generates sufficient revenue to recover fixed costs, cover variable costs, leave enough residual income to cover unexpected events?
- Know your liquidity: Most businesses “buckle-down” during a downturn to conserve liquidity. Forecasting provides insights on your net cash inflows and, consequently, the cash runway and helping prioritize significant cash outlays – essential CapEx investments, improvement initiatives, etc. and to determine the mode of financing going forward if needed.
- Be better prepared: Anthony Deden in a letter to Edelweiss shareholders once wrote: “We foresee things, not because we know the future, but because we can have certainty as to the likely consequences to our actions whether as individuals or families,” The saying “An ounce of prevention is worth a pound of treatment,” further highlights the importance of maintaining your business health, and help answer the following –
- Where can cost centers be scaled back while maintaining essential KPIs?
- How can we better allocate cash instead of spreading it thinly across all initiatives?
- Should we plan a capital raise; pursue new debt; or seek other sources of liquidity?
But, how should we Forecast?
Forecasting under uncertainty is as much an Art as it is Science. When the future is certain, we make predictions that rely on a historical trend i.e., there’s a clear path with a known trajectory, and the associated risks along the path can be quantified based on these historical trends.
A forecast in uncertain times essentially reveals overlooked possibilities and exposes unexamined assumptions on anticipated results. As the adage goes, “If you are aware of what could happen, you are more likely to deal with what will happen”. Forecasting under uncertainty can be broadly divided into 3 steps – which are iterative.
While forgoing preparing projections during uncertain times won’t help identify opportunities to mitigate risks, relying too heavily on a particular set of assumptions as a perfect “crystal ball” to predict your future is equally misguided. The key is to achieve a realistic balance while focusing on developing attainable forecasts and understanding the relationships between drivers.
While most of the time Excel serves as an effective tool in analysis, it suffers from a “lag” factor. Data constantly needs to be processed and loaded into Excel for analysis. Given the intense and repetitive nature of the work, organizations often benefit from having a forecasting tool built to leverage the data it generates in real-time.
At Bookr, our clients get access to our forecasting tool that connects with the accounting database, and by answering structured, progressive questions, a forecast is generated on-the-fly, and in approximately 15 minutes. When we set out to build this application, our objective was to empower entrepreneurs and decision-makers without the need to turn to a specialist to run sophisticated Excel models. We believe a fine balance between having a specialist and leveraging nimble tools would provide the desired speed and accuracy without increasing costs. Also, the rewards from developing and following a structured forecasting approach can be well worth the intellectual investment (and hence its utility during uncertain times).