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Forecasting Uncertainty

By Mark Bridges | January 7, 2023

Editor's Note: Take a look at our featured best practice, Budgeting & Forecasting Template (Excel workbook). New Version Updates: Model is now suitable for either a Trade or Service Company Updated CAPEX and Depreciation calculations Updated Performance Dashboard Addition of Yr 1 and Forecast Direct Cash Flow Reports Addition of Breakeven Analysis Addition of Profitability Analysis Addition [read more]

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The impact of unforeseen crises—such as economic depressions, natural disasters, and black swan events (i.e. the recent COVID-19 pandemic—is immense.  Crises can paralyze organizations and economies alike.  These times are certainly anything but business as usual for almost all organizations.  There are safety concerns everywhere.  People have restricted movement, business activities slow down, and cash flow squeezes.

During these uncertain times, customers’ requirements shift dramatically and this demands different ways of working from the organizations. For instance:

  • Key priority areas become cost containment and getting systems and tools ready to manage scores of employees commencing work remotely because of movement control during pandemics and the like.
  • Financial Forecasting, predicting scenarios, drawing conclusions, and reporting becomes difficult, volatile, and unpredictable.
  • Many organizations have to shift their entire Business Models.
  • Cost cutting measures become a norm.
  • There are massive layoffs and even closure of businesses.
  • Some have to offer online product ordering and fulfillment services.
  • Others need to work on delivering superior virtual Customer Experiences.
  • Online collaboration tools, such as Teams, Zoom, Google Meet, or Microsoft Office 365 become the new norm in such uncertain circumstances.

Most organizations tend to get cash strapped during such uncertain times while many need to resort to drastic Cost Cutting measures.  Such circumstances warrant the following elements from the businesses to come out of the crisis stronger than before:

  • Coherent Planning through Scenario Analysis.
  • Forecasting of cash flows.
  • Developing a holistic long-term view of the business.
  • Making lucid investments.
  • Building unique capabilities.

Financial Planners typically prepare financial forecasts based on historical trends, past performance, and market trends.  During uncertain times, management should focus on Cost Management and employing effective Forecasting methods.

A robust Forecasting approach that is able to manage stakeholders’ expectations necessitates 3 key steps:

  1. Select a flexible forecasting tool suite with the right level of scope and detail.
  2. Share, corroborate, and evaluate your assumptions.
  3. Outline the impact of decisions

The approach has 3 corresponding questions for each step:

  • Does our forecasting tool suite answer the questions being asked?
  • Do our base case assumptions reflect new realities and possibilities?
  • What happens if we pull the levers we have at our disposal?

Let’s dive deeper into the details of the first 2 steps of this Forecasting approach.

Step 1. Select a flexible forecasting tool suite with the right level of scope and detail.

The initial step of the approach entails using a flexible forecasting tool to create estimates by taking into account both positive (upside) and disadvantaged (downside) scenarios.  The forecasting suite should be able to provide functionalities for:

  • Estimating the impact of fixed and variable costs and any imminent sales and operational planning issues arising out of the uncertain situation.
  • Visualizing scenarios around budgets required, e.g., discretionary, mandatory, and contracted expenditures.
  • Telling a coherent story at the required frequency—e.g., forecasting weekly or monthly cash scenarios.

Step 2. Share, corroborate, and evaluate your assumptions. 

The next step necessitates putting together compelling assumptions.  Planners need to develop, communicate, and test dynamic and up-to-the-minute forecast assumptions and drivers.  They should:

  • Learn from the impact of crisis on comparable businesses around the world and the actions they take to cope with it.
  • Reconcile the base case assumptions with up-to-date financial statements, allocations, and expenditure reports.

Interested in learning more about the steps of the approach to Financial Forecasting?  You can download an editable PowerPoint presentation on Forecasting Uncertainty here on the Flevy documents marketplace.

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