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Time for a Fresh, Scenario Based 2020 Forecast

Time for a Fresh, Scenario Based 2020 Forecast

You probably know by now. Your budget is broken. Busted. Kaput. Most companies had strategic goals approved and in place for 2020. And behind most strategic frameworks is/was a roadmap on how to pay for it – and it was called, a budget. That budget possibly included value drivers such as:

  • Revenue improvement
  • Risk mitigation
  • People development
  • Asset usage optimization
  • Deploy a new technology via capital spending
  • Improve liquidity
  • Hire the best people

Face it. Your 2020 budget is probably long irrelevant at this point, and most stakeholders are painfully aware and impacted. From your sales levels and mix, to your A/R aging, to your inventory supply chain, and your workforce – how they work, how they interact and their safety, all impacted.

Let’s explore some key areas of budget inputs and assumptions that are likely acutely impacted, and why A)  more than anything you need a fresh, scenario based 2020 Forecast and B) 2021 is probably an exercise in Zero Based Budgeting. Consider this is a lesson in the risk of static budgeting techniques, coupled with the need for the right budgeting software solution, platforms and or disciplines.

Capital Expenditures – You may be facing restrictions, guidelines, and constant disruptions if you are in an industry that is building or manufacturing (either for internal usage or external). You may be forced to stop mid steam capex projects, or delay, or face material procurement struggles. The key is that you have a proper assessment of all projects and have on the shelf mitigation plans. Understand what delays are driven by Covid versus postponements that would have happened regardless. Even the scope and cost footprint of programs that will continue are likely much different.  The best practice is to treat your capex spending as a portfolio of investments. All have a strategic purpose; some have a return. Your Capex spend portfolio should have a 1 to n assessment framework applied and focus on getting the most important completed. Ensure that you have the data to measure the before and after impact to your organization upon completion of capital projects, much like you would with any other investment. Revisit your capex assumptions and ensure depreciation levels are reflective of the new plan.

Availability of Capital – There appears to be some good news here. With interest rates scraping bottom, and banks bursting at the seams with cash – there are many programs to help small businesses. Line of credit availability, along with payment deferral programs help to ease the burden on small businesses disrupted by closures and restrictions (along with Federal Programs such as various components of the CARES act, and tax credits). Banks are reducing rates (100bp or more), waiving fees, and even offering interest free lending facilities. Revisit your Long-Term debt, and interest expense. This is especially important as you project cash levels. You may take on more, but cheaper, debt to weather this storm.

Revenue – Both level and mix. This is probably the deepest of the wounds. Personal consumption is the biggest proportion of the GDP, and hence we see plummeting forecasts. Think of GDP as the symptom, with the cause being personal and business spending. Depending on your industry, you may have seen decreases anywhere from 20% to 75% (not including 100% during the shutdown). Ironically, some industries saw a boom in revenues – digital platforms such as conferencing, and streaming, delivery, and safety/hygiene. What you sell, how you deliver, and restrictions are a significant determinant on what decreases you have seen and will continue to see throughout the year. Demand is driven by multiple factors : utility, scarcity, price, substitutionality, timing of delivery, and most important, how consumers feel. This consumer sentiment and feeling of security is the gas pedal for the engine of recovery. Local restrictions may limit the RPMs for a period of time. Reforecasting your revenue levels is metaphorically an exercise in psychology. Talk to your customers, your local government officials, your industry resources, and even your competitors. Most importantly, understand how your business moves with the broader economy. That is the strongest determinant.

People costs – Your most valuable asset. The decisions that business owners and leaders had to make to close, furlough, and cut hours and pay were difficult and emotional, but the stark reality of the national emergency warranted it. Now that the US economy is trying to reawaken, planning your workforce levels and costs are much more difficult than before. Some industries may have a hard time rebuilding its workforce. Increased unit cost is likely a massive consideration here, throttled by revenue constraints (consider that social distancing may still limit the number of customers that a business can service).

For your fresh forecast, consider your remaining ‘in place’ workforce, who you have lost, where you need to rebuild, new skillsets and training, and where aggregate labor costs have increased. The increases not only include higher hourly wages, but also the costs of replacing lost workers (which can range from 16% up to 25% of one-time costs). As a result, some firms may seek to rebuild production and service capacity via convertible contract workers, or even automation (think McDonalds self-order kiosks).

Vendors and Inventory costs. Look carefully at your supply chain. Long, complex supply chains are a reality, and this greatly increases your vulnerability. Disasters that impact any part of the chain impact every link, and the interdependencies need to be thoroughly understood and planned for. Additionally, supply chain disruption contingencies should be integrated into contracts. For your forecast refresh, take a fresh look at your supply chain logistics, consider the inevitable COGS increases that others down the chain will have to pass through, and adjust your own pricing matrix accordingly.

This has been an emotionally draining, deeply painful, long road for most all of us. There have been infinite opportunities of organizational learning, and it is unlikely American businesses will be as caught off guard as what we have seen in the recent past. Future budgets will address lessons learned with higher amounts of capital and cash stockpiled, a new risk control framework, official emergency planning, changed delivery methodologies, ‘in place’ contingency technologies, and wiser (and weary) leadership. The lesson in all of this is ‘take nothing for granted’.

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