Rolling forecasts as key success factor in times of crisis
A look at the current economic data highlights the extent of the crisis following the outbreak of the COVID-19 pandemic. There is no longer any doubt that the global economic downturn will be more severe than at any time since the Second World War. The unexpected developments of the past few months have forced companies to constantly adapt to new circumstances. Plans and budgets, which had been drawn up using the usual processes before the crisis broke out, have frequently ceased to provide meaningful benchmarks. In times of crisis it becomes particularly clear that flexible, rolling forecasts are key to effective financial business management. We consider the following aspects to be central in order to ensure that rolling forecasts can be successfully used as a management tool even in times of uncertainty:
1. Focus on the main drivers of the existing business model and definition of trigger points as the starting point
There must be clarity about the key value and risk drivers of the existing business model. Especially in times of crisis it is of fundamental importance to focus consistently on those key performance indicators (KPIs) that are crucial for the successful continuation of the company. The more limited the financial scope of action is, the greater the focus must be on closely monitoring cash flow developments in order to immediately maintain solvency. The level of flexibility particularly depends on the following factors:
- crisis resistance of the business model
- current liquidity situation
- debt capacity utilisation
- other financial restrictions (e.g. covenants in loan agreements)
- flexibility of the cost structure
Depending on the scope of action, trigger points that act as early warning signs must be defined for the KPIs relevant to the company. The breach of a trigger point acts as a red flag that indicates that the resilience of the current business model is potentially at risk and that possible measures must be considered. A mechanical engineering business, for instance, should define trigger points in relation to incoming orders or conversion rate. In the case of a wholesale business on the other hand, the focus must include inventory management in order to avoid stock-out situations.
2. Defining possible scenarios regarding crisis development
The forecasts must be based on possible basic scenarios of how the crisis may develop, which must be determined in advance in relation to the relevant industry. Based on a systematic review of the market, possible developments to which the company may be exposed must be modelled. The basic scenarios differ in particular with regard to the following four dimensions:
- extent of the economic downturn
- duration of the downturn
- expected recovery time
- level of recovery in the “new normal”
We recommend defining between two and a maximum of four basic scenarios and prioritising them according to the current assessment. As soon as significant new insights are available in relation to the development of the crisis (e.g. a change in state interventions), the scenarios have to be adapted.
3. Planning and implementing any adjustments to the business model
Based on the existing business model and the possible crisis scenarios, management must take a view as to whether any adjustments to the business model are necessary in order to continue to exist successfully in the new normal after a crisis. It is important to note in that regard that additional opportunities may arise during a crisis, for example by way of acquisitions. Furthermore, short-term adaptations to the business model (e.g. temporary closures of production facilities, short-term adjustment of products or services offered) may be necessary to strengthen resilience. As part of crisis management, the management team must specify which basic crisis management scenario shall be prioritised and what conditions (e.g. specific changes to the market, breaches of trigger points) shall lead to adjustments of the business model.
4. Establishment of rolling and efficient forecasts within the company
As part of crisis management, flexibility and agility are crucial success factors. The forecasting process should therefore be structured as efficiently as possible. If such a process has not yet been established in a company, a planning team must be formed at short notice, which is able to generate a meaningful top-down forecast in a timely manner. The necessary frequency of updates to the forecast depends on the dynamics of the crisis on the one hand and on the company’s scope of action on the other.
The focus of the forecast must lie on the most important business divisions and markets as well as on the main drivers. In order to improve the relevance of forecast values regarding future developments, the efficiency with which they are prepared and the extent to which they are up-to-date carries a stronger weight in times of crisis than a high degree of detail in the planning.
The results of the forecasts must be prepared for management in a timely manner, taking into account various scenarios. KPIs with their corresponding trigger points must be shown in a dashboard at all times and form the basis for defining any measures. In addition to the analysis of the current performance figures, the forward-looking scenarios constitute key information for management to lead the company through the crisis into a new normal. We consider it to be essential for any measures taken to be closely monitored and reported on in terms of their implementation and impact.
5. Agility in performance management after the crisis
The high degree of uncertainty regarding the progress and effects of the crisis as well as the restriction on the scope of action currently force companies to be more flexible and dynamic in their financial management, including in terms of forecasting. This agility in performance management should be maintained after the crisis has hopefully been successfully resolved. The processes introduced at short notice and under time pressure should be reviewed and, if necessary, adapted and optimised. In addition, coping with such a crisis situation can lead to a positive increase in focus of the business model and provide useful insights into which resources are really required in the future.