Most companies prepared annual budget for 2020 some time in late 2019. Those budgets are now irrelevant. In this time of unprecedented uncertainty, it is difficult to forecast the future and nail down budgets. Here is how to build a resilient budget and forecast for 2020.
How to forecast and budget for 2020 in a crisis with significant uncertainty
Any organization that is not re-doing their 2020 budget from top to bottom is negligent.
Hit the reset button. All the assumptions in the budget have to be revisited. Market sizes have shrunk, customers are retrenching, pricing is shifting, regulations are changing, salaries are adjusting, suppliers are struggling or refocusing, supplies may have dropped in cost or may be unavailable at any cost, financial markets are gyrating.
“Any organization that is not re-doing their 2020 budget from top to bottom is negligent.” Jeff Kuhn, cofounder and administrative partner at FLG Partners, which is a leading CFO consulting and services firm in western United States. Kuhn has seen CFOs from FLG Partners work with numerous companies to re-do their 2020 budget.
See the glass as half empty. All companies should have a conservative 13-week cash forecast, every week. Companies that need to raise financing should do a 26-week cash forecast to give themselves a runway to get funding. The forecast should reflect all sources of cash, line by line, and all uses of cash, line by line, with timing of coming in and going out. Often there is a mismatch of lumpy cash flows in but steady weekly cash out for payroll.
Run multiple scenarios. Most companies will have 3 scenarios: a pessimistic case, a base case, and an optimistic case. The pessimistic case is used for conservative cash planning. The base case is for setting executive targets and incentives. The optimistic case gives a view of upside with additional funding or resources and to understand potential growth upside in evaluating additional funding or M&A.
No battle plan survives first contact with the enemy.
Build flexibility. Companies can furlough employees instead of laying them off to have a quick path to restart. Temporary contractors allow quick ramp up of some temporary activities and flexibility for quick ramp down. The plan should build redundancy in supply chain and diversification in customers. Cash reserve and capacity on lines of credit gives liquidity to respond to cashflow disruptions or fluctuations. Some companies may need to pivot their business model to be relevant in the post-crisis world.
“No battle plan survives first contact with the enemy,” said Helmuth von Moltke the nineteenth century Prussian military commander.
Strengthen the core; Companies should focus on saving cash and sustaining the core business and defer hiring or expansion plans. Every expense item could be scrutinized. Can leases be renegotiated for abatement, deferment or reduction? Companies are reviewing salaries, especially in light of some government stimulus package that caps benefits for executives at $100,000 for small business or $3M for executives at large companies. Marketing, advertising, and training may be deferred. On revenue side, companies should closely review revenue sources and effectiveness of sales channels. It’s an important time to stay close to customers. Everyone is hungry for communication. Many CEOs are calling key customers directly.
Have dynamic budget models In 2008 financial crisis, some companies revised their annual budget 6 times. It’s important to have robust financial models with flexibility to update the key drivers quickly and easily. Identify key assumptions (headcount, market growth, % market share, variable expenses, pricing) and make the model dynamic to be able to change the assumptions as needed.
Decide with core team but communicate to all. Build a war-room with the leadership team. This small nimble team will align with the board on shared assumptions and revise the plan accordingly. Then the small team will communicate the revised plan widely to everyone impacted as quickly as possible.
Focus on what you can see in your headlights. We are driving in the fog at night. Companies should focus on a short-term plan of urgent priorities for 2020 and defer the longer plan when future becomes more visible and more stable.
The assumptions you make today for remain of 2020 may change in a month. As the fog clears, be flexible to reforecast.
