The COVID-19 pandemic and its impact on the broader economy have created unprecedented uncertainty for management teams and investors, while rendering many existing business plans irrelevant. This uncertainty has made it much more difficult for most businesses to accurately forecast growth, operating metrics, and liquidity. To better prepare for the future, and any challenges and opportunities it may hold, companies need to invest the time to refine their forecasting capabilities. That includes deciding when to accelerate recovery spending and what financing the business needs to execute its plan.  

As companies work with investors and lenders, clearly outlining cash runway and financing requirements is imperative to prepare for different scenarios. While growth is still highly attractive to investors, in times of uncertainty, they often place greater emphasis on strong performance metrics overall, cash burn rate, and a path to profitability. Reliable and realistic forecasting helps to build credibility with stakeholders and allows for better ongoing communication. 

In this post, I outline some of the actions companies can take to ensure the quality and reliability of the financial forecasts they prepare for key stakeholders, including their management, equity investors, and lenders:

  • Collaborate across functions to build out assumptions. Forecasting for impacts of COVID-19 and economic downturn requires agile and responsive decision-making amid ongoing disruption to business conditions. Forecasting through that disruption generally  requires extensive cross-functional collaboration, including review of real-time, business-relevant data and metrics. For SaaS companies, it’s critical to ensure that  finance and sales are aligned to accurately forecast revenue, growth, and expenses. 
  • Include sufficient detail. Monthly forecasting that integrates the income statement, balance sheet, and cash flow statements provides important insight to all stakeholders. Companies should also consider whether more granular detail is required including weekly cash flow forecasts. Robust forecasts should focus on drivers that matter most to the business and should be flexible enough to accurately reflect the impact of changes in key assumptions. Supporting schedules including revenue build, headcount and payroll breakdown, and debt schedules are useful in understanding inputs to the projections. 
  • Customize scenarios to particular contexts and challenges. Sensitivity analysis and stress testing are key components of building a realistic forecast and preparing for multiple scenarios. Consider identifying a range of possible outcomes, paying special consideration to any downside or worst-case scenarios. Stress testing key assumptions and drivers is necessary when determining possible scenarios and should be quantified clearly. This will allow stakeholders to identify any downward pressure on liquidity and financial covenants.
  • Realistic forecasting to achieve plan. Balancing attractive growth targets with realistic forecasting is challenging. However, realistic forecasts are crucial to understand tighter liquidity points and any potential to breach lending covenants. Historical attainment of financial projections and being able to achieve plan helps build credibility with investors and lenders, and clearly articulates performance. This will allow you to seek out additional sources of capital early.
  • Monitoring and refining. Financial models will need to be updated and flexed to reflect actual results and new developments. Understanding key drivers and assumptions will help identify your most important leading performance indicators. Monitor these indicators closely and use them to reforecast in a timely manner. Always ensure that you have a robust feedback loop between your commercial, operational, and financial functions. 
  • Ongoing communication with investors and lenders. Management should work with their board, shareholders, and lenders to plan for longer fundraising cycles. Discuss adjusting operating plans and strategic priorities early and as needed. Agreeing on expectations, being forthcoming with information, and clearly outlining financing requirements will provide the insight to investors and lenders to better understand how to help.

A disciplined approach to financial forecasting can help companies manage through times of uncertainty. In a downturn, it’s important to have a clear understanding of cash needs and to be more conservative in runway forecasts. Companies can prepare for volatility by extending their cash runway and understanding flex in their business model. The above recommendations will help to ensure that management is prepared for multiple scenarios and able to communicate with investors and external stakeholders effectively.