2021 Budget Forecasting Amidst a Pandemic
As we enter the typical fall budgeting process, G2 has been assisting our clients in exploring new ways to approach 2021 forecasting given the uncertainty related to the COVID-19 pandemic and its impact on various industries over the near to medium term. Many operators and their finance teams are struggling to reliably forecast their businesses, making strategic planning more challenging and limiting stakeholders’ ability to assess the long-term prospects for their companies. Through our financial advisory and turnaround consulting engagements, G2 has been leveraging a number of key practices to enhance the productivity of 2021 budget building, helping companies and their management teams plan proactively manage the uncertainty:
• Consider New Methodologies
o Year-over-year variance modeling – When a business has seen temporary pandemic related demand disruptions, we’ve applied efficient top down discounts to 2019 actuals or 2020 original budgets to drive revenue assumptions for 2021. The top down discounts can be refreshed based on latest views on the depth and duration of the impact of the pandemic on a particular business or industry. By layering on updated cost structure assumptions based on management’s various initiatives, a full profitability picture can take shape. For indoor businesses, like restaurants or retailers, G2 has been similarly modeling the revenue impact of the pandemic through the winter months in colder geographies in the U.S.
o Bottoms up around the “New Normal” – For companies with significant and likely permanent changes to their operating realties, a bottoms up full budgeting process may be the preferred method. Benefits include revisiting detailed revenue assumptions, which can prompt creative approaches or calls to action to drive new revenue opportunities. Similarly, divisional level, line item by line item review of cost structures can yield material expense reduction opportunities or nimbler, potentially tech enabled operating models explored during the pandemic.
o Build multiple “cases” vs. one baseline budget – Clients that severe pandemic related revenue declines have typically taken a scenario modeling approach to budgeting, focusing more on potential states of the world and the associated impact on the business, rather than on presenting one budget, that with certainty will be wrong.
• Scenarios modeling is more valuable than ever
We value “sensitizing” forecasts based on key assumptions and drivers in order to stress test profitability and liquidity in times of significant uncertainty. By creating upside (vaccine in Q1) and downside cases (no vaccine), leadership teams arm themselves with key insights on the range of potential outcomes for both revenue and expense level recoveries. Furthermore, stress tests provide clients with insight into what breaks the business and how to proactively manage cost structures and liquidity (keeping dry powder for CAPEX or working capital investments) based on topline trends and other key indicators of business activity. Commodity costs can be a key driver of margins and warrant particular scrutiny in scenario models. Stress testing covenants and minimum available liquidity is critical in leveraging forecasts as a tool to provide transparency and peace of mind to lenders at this time. Consider also pulling forward the budgeting process timeline in order to get estimates of potential outcomes in 2021 earlier, allowing management to take more aggressive action sooner.
• Flexibility may be more valuable than granularity
In times of high uncertainty, building granular bottoms up forecasts require significant resources and provide limited value given the pace of change. The return on those resources can be enhanced by building flexible models that can be updated over the course of the year with actuals and refreshed on a rolling basis. A dynamic forecast is highly valuable in providing leadership with real time forward views and empowers nimbler responses on driving revenue opportunities and trade-offs on investment, especially in a recovery scenario where working capital requirements can be significant.
• Bridge Building
We recommend tracking the impact of COVID-19 on revenue, costs, and cash in order to bridge between 2020 actuals to a pro forma, adjusted view of the business. Analyzing 2021 forecasts and scenario cases through EBITDA or free cash flow bridges isolates key assumptions and plays a critical role in educating stakeholders on drivers of performance. For more challenged situations, sizing cash needs becomes a critical output of the 2021 budgeting process, whether funding operating losses or working capital. Solving for these liquidity needs in the form of a “cash bridge” has been a key focus across many G2 engagements with pandemic impacted companies.
G2’s highly capable team, including seasoned interim CFOs, Controllers, or FP&A resources, not only can help our clients navigate challenging liquidity or performance environments, but also can drive improvement in core finance/accounting functions. Feel free to reach out to the G2 team to learn more about the approaches we are using across our 45 plus clients in our industries of focus.